Investing Basics for Financial Wellness

For the past several years, as we have come to recognize the damaging effects that employee financial stress has on company productivity, more and more employers are planning to incorporate financial wellness programs into their benefits offerings. To date, most companies prioritize educating their employees on financial markets, investing, and financial planning in their wellness programs.

With 401(k) and other retirement plans already in place, it is an easier first step to design financial wellness programs that build on and support these existing benefits. It helps those who have some savings and investments make sure they are managing them well.

If employers are choosing to focus on educating their employees on how to build and manage an investment portfolio, then it’s vital to get it right.

This means starting with and emphasizing the basics of building an investment portfolio that has, first and foremost, a strong and balanced core allocation to growth and income investments, with the right amount of cash holdings (not too much) and, only when that is in place, the addition of aggressive growth investments.

Such an approach is particularly important when we consider the noisy media coverage frequently granted to celebrity investors making big, splashy returns on the high-risk investment of the day. Rarely does the media point out these high-flying investors probably have an enormous and well-diversified portfolio to begin with, so that these risky bets represent only their “aggressive growth” holdings. On the other hand, investment decisions that slowly build financial security, step by step, rarely make headlines. As a result, the misconception that dealing with one’s money is all about “playing the market” for a big investment win has become dangerously common.

The latest such story is Bitcoin. Reading the press today, you’d be tempted to believe that the average person should actually own some. I shared an Uber with a 20-something couple in Brooklyn the other day who was talking about their bitcoin purchases. I was not rude enough to ask about their overall portfolio holdings, but I had a strong sense that bitcoin represented their first foray into the investment world.

A sound financial wellness program can help rectify this type of mistake.

To understand what we mean by starting with the basics, let’s look at what a typical investment portfolio might look like for someone in their 20s, 50s, and 70s.

Remember, when you are just getting started, you should build your portfolio from the middle out.

Start by investing your incremental savings into stocks and bonds, ideally through low-cost mutual funds, in different vehicles such as your 401(k), investment portfolio, and IRA, in the appropriate balance for your age.  The right mix will lean towards a higher percentage in growth investments in your earlier years and will transition toward income investments over time, generally in the range of 80% for growth and income investments combined.

With a balanced portfolio of growth and income investments, and the right amount of cash which is up to 10% depending on your circumstances, you can “play with” the final 10% of your portfolio and explore some more aggressive investments that offer potentially high returns, but that are by definition highly speculative and risky.

Employees who have the first 90% of their investment portfolio solid overall can afford to make riskier investments with the remaining 10%. They can “play” because their overall financial security is not at stake. But many of our employees have not yet reached that point.

A successful financial wellness program, such as Sum180, will start where our employees are – whatever that point may be – and steadily build the foundation that makes long-term financial security possible.