By Barbara O’Neill, Ph.D., CFP®
Many young service members learn about investing for the first time when they join the military and enroll in the Thrift Savings Plan (TSP). Unless they took a personal finance course in high school or discussed investing with their parents, Personal Financial Managers (PFMs) are likely to be their first investing instructors.
A key theme in investing that never goes out of style is building a diversified portfolio to reduce investment risk. Below are four key investing concepts for PFMs to suggest to their clients in group briefings and 1:1 counseling:
- Quantify Your Goals. Encourage clients to write down their goals with the projected cost and a time deadline. Doing this will help them select appropriate investments and provide the motivation required today to set money aside for the future. Examples include “increase my savings by X dollars by May 2023,” save X dollars to buy a “new used” car in May 2024,” and “retire at age X and have an income of $X in today’s dollars.”
- Discuss Risk. Tell clients that investment risk “comes with the territory.” In addition, even cash assets like money market funds and bank savings accounts have a risk of loss of purchasing power due to low returns and inflation. In a soundbite, “Investing means taking risks, and not investing also means taking risks.” Specific risks for service members to be aware of include market and business risk for stocks, interest rate risk for bonds, and currency risk for foreign investments.
- Assess Your Risk Capacity. Encourage service members to use one or more tools like the University of Missouri’s Investment Risk Tolerance Assessment to honestly self-assess the level of financial risk that they are comfortable with. This online survey contains 13 questions and has been rigorously empirically tested. There are no “right” or “wrong” answers and survey respondents receive a score and an analysis of what their score means.
- Beware of Emotional Reactions. Advise service members not to panic and sell during inevitable market downturns. They will likely experience many during their working lives. There are two key emotions that tend to drive investor decisions: greed and fear. A well-known graphic, called The Cycle of Market Emotions, shows that investors often buy stocks until a high point (euphoria) is reached and sell them at a low point (despondency). Caution against market timing.
Check out Part 2 next week for four additional diversification tips. For additional information about investing, review the Cooperative Extension course Investing for Your Future.
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