How Perfection Will Derail Your Retirement

One of the biggest obstacles investors face on the road to a secure retirement is the pursuit of perfection. This may seem counterintuitive. Our culture touts “practice makes perfect”, we should be continuously training to achieve perfection. Unfortunately, in the world of investing, striving for perfection generally leads to inaction and missed opportunities. Continuously searching for the ideal set of circumstances, which never seem to materialize, causes folks to delay the important planning necessary to prepare for one’s financial future.

The below list highlights several traps into which investors fall in their quest for investment perfection. Investors should be aware of these missteps and not let them inhibit their ability to achieve their financial objectives.

1. Waiting for the optimal time to invest: While keeping 3 to 6 months’ worth of cash on the sidelines is important in case of an emergency, keeping several years’ worth of money sitting in cash, money market funds, or short-term bonds is imprudent for most investors. It is common for people to want to wait for an ideal time to put their money to work. In truth, there is never a perfect time to invest. There will always be some type of turmoil in the world that gets people nervous: war, geopolitical risks, market gyrations, increasingly high stock valuations, a global pandemic, a presidential election, and more. Trying to time the market for the best entry point could just lead to years of waiting and missing out on compound interest.

This issue is particularly relevant today, when investors are tempted to sit on the sidelines given yields on cash are at multi-year highs. Money market funds are paying attractive rates relative to what they were paying over the past 15 years. However, over time the returns on cash or cash equivalents will not be able to outpace inflation. Maintaining too large of a cash position may seem prudent, but it only provides a false sense of security and will lead to losing buying power.

2. Searching for the perfect investment: Every investment carries risk. Sometimes investments work out, and sometimes they don’t. Remember that risk and reward are inextricably linked. The purpose of taking risk is to generate a return on one’s money. If you want high returns, you will need to take a high level of risk. These risks can encompass a variety of things, including illiquidity, default, and leverage. It is a fruitless pursuit for investors to spend an inordinate amount of time searching for a perfect investment opportunity that provides high returns with no risk. It’s far better to spend time developing a strategy that provides a high probability of achieving an investor’s financial objectives and balancing risk by diversifying one’s funds across asset classes.

3. Buying at the best price: It’s human nature to want the best deal. However, waiting for the market to trade at some arbitrary price often leaves investors waiting indefinitely. If you have a prudent strategy in place, then hoping for the market to trade at certain levels is ill-advised. Moving forward immediately with your strategy is generally the right decision. The best time to invest is always today.

4. Implementing the perfect portfolio: There’s an infinite amount of literature on portfolio construction. Two investors with the same risk profile, goals and time horizon may have different portfolios suggested to them by various investment firms. All those portfolios may be reasonable. In fact, the more one reads, learns and researches, the more one concludes that there is no one correct way to invest in the market. There are only wrong ways, which include overconcentration in one investment, having no liquidity, or pursuing esoteric strategies. As long as you are diversified in a portfolio of stocks, bonds, and cash, you are likely ready to get started.

5. Delaying savings until attaining an ideal life situation: When young professionals approach me, I always encourage them to save as much money as possible into their company’s corporate retirement plan. Even if their cash flow is not great. When you are young, with fewer responsibilities and financial commitments, is generally the best time to save.

6. Refusing to act until you’re in an optimal tax situation: Some sophisticated investors stall on making decisions because of the tax ramifications. I know investors who have delayed implementing a more sensible strategy because they are paralyzed by a particular tax liability that would be triggered from repositioning their portfolio. There is no question that taxes are an integral part of any financial plan. However, investors should not remain stagnant because they will need to pay taxes. As I tell these clients, “Don’t let the tax tail wag the investment dog.” Folks who fail to act because of taxes oftentimes end up taking on other risks within their portfolio that will cost them dearly. This includes underperforming investments, overconcentration in one particular stock, and an allocation that is no longer aligned with their goals. Instead of focusing on the tax minutiae, look at the big picture.

At the end of the day, the simple act of getting started on an investment strategy is often the hardest part of any financial plan. It’s important to overcome the urge to try to find a more perfect situation. Perfection is a theoretical construct and not attainable. It’s far better to make progress, however imperfectly, and adjust along the way. Remember, procrastinating in search of perfection is a decision, and it’s usually the wrong one.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures.