Raleigh NC Financial Advisor: Year-End Review

"Am I investing the right way for my situation?" It's a source of anxiety or confusion for many investors in the best of times.

Consider our simple 3-step checkup plan to help find out.

1. Focus on your goals 

Why are you investing? You may have some longer-term goals, like retirement, and some shorter-term goals, like buying a new car or a house. The time frame around your goals, along with your tolerance for risk and your financial situation, will help determine your investment strategy. If you have a goal that is a long time away, like saving for a child's education or saving for retirement, short-term ups and downs in the market have historically turned out to be blips over the long term.

Let's start with saving for college as an example for determining how much you may need to save and invest. Say you envision sending your newborn to an in-state public school and plan to cover half of the expenses with your savings (with the remaining half to be covered by a combination of scholarships, grants, and loans). According to the College Cost Calculator from the College Board, the total cost would be about $222,466, for which you will pay $111,233 over the course of 4 years. 

We estimate you would need to save about $200 per month over 18 years. Saving less per month would require a longer time period over which to save—or a higher rate of return, which you can't always count on.

What about retirement savings? For a 25-year-old planning to retire at age 67, we would suggest aiming to save 1x (one times) your salary by age 30. By the time retirement hits, we estimate you should have amassed 10x your salary.

Here's an example—if you earn $100,000 per year as a 67-year-old, 10x your salary means you would aim to save $1,000,000 by retirement at age 67.

2. Check your asset mix

Year-end is a good time to check if your investment mix still lines up with your risk tolerance, time frame, and goals.

A diversified portfolio consists of a variety of investments with varying patterns of risk and return—like stocks, bonds, and short-term investments. If one part of your investment mix is declining, another part may be doing well, or at least not going down as much. The goal of diversification is not necessarily to maximize performance, the practice is designed to help reduce the volatility of your portfolio over time.

Ensuring that your mix of investments continues to reflect your chosen level of risk—and that the level of risk is still appropriate—is an important part of the review process. Market moves, for instance, can mean more stocks, and risk, or less than you had planned. Or you may find your allocation to bonds has strayed away from where it should be.

Check your asset mix at least once a year to help keep it on track with your objectives. If your goals change significantly—or after big moves in the market—review your investments. If your investment mix has drifted significantly from your target mix of stocks, bonds, and short-term investments (for example, by 10% or more), consider rebalancing your portfolio to your initial target mix.

A good rule for rebalancing is to first confirm that your mix is still right for you. Then if it is, consider directing more of your contributions into the asset classes that have lagged and reduce purchases of those that have appreciated. Consider bringing your portfolio back to the target asset mix at least annually—the habit of doing so will allow you to maintain your portfolio in a disciplined way.

3. Benchmark individual investments

You should look at your investments to ensure that they are still an essential part of your plan. Evaluate the performance of stocks, bonds, mutual funds, or ETFs by comparing them to appropriate benchmarks. Work with a financial advisor or financial planner to evaluate the performance of your investments.

Answer these questions:

Why did you buy this investment? 

Does it still fit into your strategy? What role is it supposed to play in your overall plan? Different investment types play a role in your portfolio and may provide varying patterns of risk and return. For instance, does it give you more exposure to domestic bonds or international bonds, or does it target a particular style of equity investing, like value or growth?

What is impacting the performance of your investment?

How does it compare to others like it? For instance, what is going on in the world, in the stock market, or in the industry, that affects returns? Keep in mind that different types of investments do well at different times.

Are you considering performance and risk?

Look at how your fund has performed relative to the benchmark index—as well as similar funds. Recent performance shouldn't be your only metric—consider annual performance in the context of fees as well.

Risk is another important dimension—it's important to evaluate the historical risk (variability of returns) associated with a fund's historical return. Risk-adjusted returns can be a useful metric when comparing funds with different levels of risk and/or return.

How much do your investments cost? 

Within a given asset class, category of mutual funds, or among investment products, costs can vary quite a bit. And the amount you pay can impact your overall return over time. Consider expense ratios as you’re evaluating mutual funds for example. If funds from different providers have the similar levels of risk and return, the expense ratio can be an important factor to consider.

Get help if needed

Don't get discouraged if it seems like a lot of work. Asking for help with your investments could keep your portfolio in good shape to achieve your financial goals. Of course, the do-it-yourself approach works too - as long as you have the inclination, skill, and time to invest appropriately for your goals and time frame.

Whether you choose your own investments or pay someone to help you, saving and investing for your goals takes patience and consistency. Seeing your hard work paying off through the years as you get closer to achieving your objectives can keep you motivated and on track.

Sources:

https://www.fidelity.com/viewpoints/financial-basics/annual-financial-review

Disclosures:

This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.

This material is provided as a courtesy and for educational purposes only.  Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.

Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss. As with any investment strategy, there is the possibility of profitability as well as loss.

 Mutual funds are offered only by prospectus.  Carefully consider the investment objectives, risks, charges, and expenses of mutual funds before investing.  This and other information is contained in each fund’s prospectus, which can be obtained from your investment professional and should be read carefully before investing.