When you boil down the elements of a successful financial plan, you get three simple rules:
- Save as much as you can.
- Invest your money so it will grow.
- Avoid taking more risk than you need to.
As easy as that sounds, coming up with a plan and sticking to it often takes more effort than you'd think. Unfortunately, a bunch of factors constantly work against you, trying to derail you from those three basic principles. Let's look at five of the most significant threats to your finances -- and how you can claim victory over them.
1. Bad business management
Investing in stocks has helped many investors make their fortunes. But one of the toughest things to do as a shareholder is to find corporate executives who'll watch out for your best interest.
For years, top-level managers at many companies have played fast and loose with the money they're charged with safeguarding for their shareholders. The recent SEC settlement related to alleged options backdating at Research In Motion (Nasdaq: RIMM ) is just the latest chapter in an ongoing saga that ensnared companies as diverse as Apple (Nasdaq: AAPL ) and Home Depot (NYSE: HD ) .
Despite efforts like Carl Icahn's United Shareholders of America initiative to defeat greedy executives, the best remedy investors have is to find managers with integrity, who will simply avoid those conflicts of interest entirely. That's not always easy, but it's not impossible, either.
2. Inflation
Sure, inflation may be the last thing on your mind right now, but don't fall for the idea that it's gone forever. As nice as it is to pay less than $2 per gallon for gas, we're only one economic recovery away from perhaps seeing energy prices spike upward again.
Inflation jeopardizes some investments more than others. Bonds and cash vehicles can lose substantial value in an inflationary environment, as do companies that have to pay inflated prices for their raw materials. On the other hand, providers of those raw materials, including mining companies like BHP Billiton (NYSE: BHP ) and energy producers such as Chevron (NYSE: CVX ) , can perform extremely well during inflationary periods, as their products rise in value quickly. Invest with inflation in mind, and you'll be prepared for whatever prices do over time.
3. Costs of investing
Everywhere you turn, it seems like someone wants a piece of your action when you invest. Whether it's a brokerage commission, a hidden fee in your 401(k), or the costs of having an asset manager handle your money, there's a price to pay for most investments.
You can't avoid investing costs, but you can minimize them. Index funds and ETFs give you low-cost ways to get exposure to exactly the type of stocks you want. If you're comfortable making your own investing decisions, buy individual stocks instead of paying thousands to an active fund manager. You'll end up well ahead in the long run.
4. Taxes
Similarly, taxes play a big role in managing your investments. If you're not careful, the government can take up to a third or more of your profits away from you -- so you always need to be conscious of ways to save.
At least for now, tax laws encourage investing in income-producing stocks like General Electric (NYSE: GE ) and Johnson & Johnson (NYSE: JNJ ) by giving shareholders a preferential low tax rate on dividends. But with the potential for higher taxes in the future, you'll want to make the best use of tools like Roth IRAs to shelter your money from taxation.
5. Yourself
Especially in tough times, you can be your own worst enemy. It's hard to stay focused on a plan that spans decades when it seems like more things are going wrong every day. Your emotions can get the better of you, creating errors that will cost you a ton over the long run.
The good news is you can overcome your fear and be a successful investor. The first step is knowing that you're vulnerable to overconfidence and irrational behavior, and always being on the lookout for it. If you can do that, seeing the potential warning signs is far easier.
You'll run into each of these threats repeatedly throughout your investing life. But you can overcome them -- and once you do, you'll realize you're back on track to reach the goals you've always wanted.
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