![[Video] FRS Investment Plan Mistakes to Avoid](https://images.squarespace-cdn.com/content/v1/5aa1862fda02bccbc44267f2/1727798602292-VYEELF4O7WBY2QLG4O4F/FRS-Video-IMG2.png)
We know the FRS Investment Plan is the right choice for, really, just a few of you. But that’s not what this video’s about. What we are going to talk about are the mistakes we see participants making that are costing them big money and that could have been easily avoided if they were just aware of them. So let’s get started.
1. Changing Plans Too Soon
The first mistake we see, and probably one of the most common, is pulling the trigger too soon and switching from the default Pension Plan to the Investment Plan too early in your career. Now, if you’re not Special Risk, this doesn’t apply to you because regular class defaults to the Investment Plan. But if you are Special Risk and you’ve decided the Investment Plan is right for you, at some point you need to make that second election to change from the Pension to the Investment Plan. But when?
There’s a lot of variables here to consider. Your expectations around your future pay, when you plan to retire, your age, your years of service all factor in. Even how aggressive an investor you are and are comfortable being can make a difference—which we’ll talk more about in a minute. But cut to the chase: Overwhelmingly, most of the time when we run the projections with folks thinking about this, the answer we get back is usually to hold off until just before you separate from service—or at least until you are retirement age eligible. But that doesn’t mean that’s the right answer in your case. Run the numbers.
2. Market Risk
The second mistake we see is FRS Investment Plan participants not understanding market risk and basically either not taking ENOUGH risk or taking risks that simply don’t have historical evidence of paying off—in other words, stupid risk.
Now, in that first category—not taking enough risk—the typical scenario we see is the participant who creates an Investment Plan account that historically doesn’t have much of a chance of meeting or beating inflation—or the cost of living. They may feel good about their plan not having much volatility, but what they don’t realize is they also don’t really have much of a chance of having real growth above the cost of living either. I look at a plan like that, with lots of safe low-expected-return investments in it, and I see a person basically setting themselves up for failure. And it’s a shame. This person either needs to learn more about how markets work and how to capture the return in global markets or they need to be in the Pension Plan.
The second category—what I’d call stupid risk—is the participant who’s using their Investment Plan account to buy individual stocks that they think are going to outperform the rest of the market. Or—and maybe in addition to that—they are trying to time the market by participating when times feel good to them and laying back when things get a bit dicey. The reality is that all the data points to this investor as being most likely to have a sub-market return over the long haul. Now, they’ll get great returns in time periods when you almost couldn’t fail (like a year we’re having now in 2024, for example), and that’ll bolster their thinking that they know what they’re doing. But what I’m saying here is, over the long haul the evidence is overwhelming that for the vast majority of investors, they’d have been better off just buying equal shares of everything in the market than trying to outsmart it. And unfortunately, when they finally realize this, if they ever do, they will be that much closer to retirement and will have lost the most precious commodity they had: time.
3. Bad Advice
Getting bad advice. Be careful who you talk to about this stuff and whose advice you’re taking. I’ve talked about this in other videos, but just because the guy who talks a good game in your station, sounds like he knows what he’s talking about, doesn’t mean he knows what he’s talking about. You might want to think about getting a second opinion.
Same with professionals too. Look, investment consulting is just one of many things a good wealth manager should be helping you with, if you are using professional help. But like any profession out there, some are just better at it than others. Maybe a second opinion here might be a good idea too?
4. Investment Policy
Investment policy: two words you don’t hear together very often and something we see even less. Investment policy is knowing exactly how you plan to capture the return markets produce, what you will do when markets go up, and what you will do when markets go down. It’s typically written down, and it’s the basis of your investment strategy going forward.
We believe that investment policy should have evidence behind it that shows that it actually works. Time-tested and proven, typically coming from the academic side of market research, not the Wall Street side. The importance of having an investment policy is that it brings in discipline and takes out the emotional component of decision-making by having a clearly defined strategy, like a road map, to follow.
Without an investment policy, I simply wouldn’t even consider the Investment Plan side of FRS. Having a poor or non-existent investment policy, to me, would be setting yourself up for failure. And you can’t fail at this. Your security and legacy depend on it.
Conclusion
If you’re in the Investment Plan or if you are considering the Investment Plan and you would like to talk to an advisor that isn’t going to try to sell you an annuity, a life insurance policy, or some sort of high-cost mutual fund program—in other words, a fiduciary, fee-only advisor—we’d welcome the opportunity to talk and see if we here at Northstar might be a good fit for you.
Give us a call, and let’s talk. I can tell you only one of three things is going to happen. One, we’re not the right firm for you. If that’s the case, we’ll point you in the right direction to get the right kind of help you need. Two, you’re doing a great job. You don’t need us. Keep doing what you’re doing, and know you’re on the right path. Or three, maybe we can add some value to your life, and we’ll explain how that works. In all three cases, you’ll be better off. That’s our goal.
Hey, thanks for watching, and stay safe out there!