The snickers because of your holiday sweater have ceased, the presents have been opened, decorations have been stored away for another year, and the champagne has been toasted. So what is next? It is time to discuss New Year’s resolutions that could help lower your stress and pad your wallet. Here are a variety of ways to get your financial situation in better shape.
Investment Portfolio
Do not worry about beating the experts or keeping up with the Joneses. It is more important to focus on your goals.
Set a Plan.
Determine your risk tolerance–the degree of uncertainty that you can handle in regard to a negative change in the value of your portfolio. Keep your time horizon, spending needs, and other circumstances in mind when determining your risk tolerance to allocate your portfolio assets appropriately. A financial planner can be very helpful in this decision.
Pay Yourself First.
We recommend investing in your 401(k) at least up to your company’s match. Even if your company is not matching your contributions, you should still be putting some money toward your retirement account. We suggest setting your 401(k) contributions to the highest level you can handle ($16,500 max for those under age 50; $22,000 max if 50 or older). If you are self-employed, consider talking to a professional about other special tax-savings opportunities, including Solo 401(k) plans, SEP-IRAs, and Keoghs. You can also arrange for funds from your checking account to be automatically shifted to an investment fund every month.
Rebalance As Needed.
Depending on your risk tolerance factors, such as your age, income, etc., and portfolio’s performance, it may be time to rebalance. When you rebalance, you trim assets that are overweight and use the proceeds to invest in underweighted assets, or you can use new investment dollars to buy underweighted securities. In doing this, you may be able to benefit by buying low and selling high, since often overweighted assets have performed better and underweighted assets should be relatively cheaper. However, tax consequences should be considered before making these decisions.
Review Your Losers.
In addition to reviewing the big picture and your overall asset allocation, you should compare the returns of your individual investments with their appropriate benchmarks. If an equity fund underperformed its benchmark by 3% to 5%, try to find out why. If the portfolio manager strayed from his investment style/objective, it might be time to sell. If the fund’s style was out of fashion, it may be worth it to keep the fund in hopes for a turnaround. If a fund has consistently underperformed its peers for multiple years, you may be better off dumping it for a better long-term performer.
Convert For Tax Free Growth.
While you will be hit with taxes up front, converting a traditional IRA to a Roth IRA will allow your money to grow tax free. As another bonus, there are no required minimum distributions after age 70. This may not be beneficial if you are going to pay too much in tax for converting. This decision should be carefully considered with the help of an investment professional or tax consultant.
Consolidate Your Accounts.
If you are stressed about pulling your financial statements together, you may have your money invested at too many places. You could eliminate a lot of questions and headaches by keeping your accounts (brokerage, retirement, etc) at one custodian. You may even be able to save money since customers with higher account balances typically get breaks on trading costs, custodial fees, management fees and sales commissions.
Be on Your Best Financial Behavior
Instead of viewing your newfound financial responsibility as a burden, view it as a lifestyle and ongoing learning process.
Establish a Game Plan.
A long-term strategy with predetermined guidelines for buying and selling should be able to help you avoid emotional decisions when the market gets turbulent. Setting a target price for a stock can help you buy low and sell high. A diversified portfolio also can help balance risk because some sectors perform better in a recession, such as staples and utility companies, and others better during a recovery, such as discretionary and industrial companies.
Know Your Holdings and Why You Own Them.
Knowing why you bought a stock can help you be impartial when it comes to evaluating it. We suggest setting minimum criteria for holding a stock. If a stock’s ratings drop below the threshold, it is time to sell. You should also know how an investment fits into your portfolio. For example, you might own PepsiCo because you believe people are always going to eat chips and drink sodas, or you might own Tiffany & Co. because you believe people are going to purchase jewelry for their loved ones.
Remember It’s All Relative.
Portfolio returns vary because asset classes react differently to economic and market news so it is best to pick a benchmark whose performance best reflects your portfolio. If your stock holdings are performing inline with the S&P 500, you can take comfort in your investment decisions if they include large cap U.S. based stocks similar to those in the index.
Repeat After Me, “This Too Shall Pass.”
You have no doubt heard people say, “It is different this time.” Fact is, it is always different because markets are cyclical. If you did not sell at the peak or did not buy at the low, another opportunity will likely come up. A volatile market is a difficult time to turn your portfolio on its head.
Learn From Your Mistakes.
In a bull market, everyone can pick winning investments. It is when the chips are down and market is falling that separates the savvy investors. Remember, even the best investors make bad stock picks. Sometimes it may be in your best interest to take a tax loss on that loser. More importantly, you should learn from your experience and apply that knowledge in your next investment decision.
Dividend Defense.
In the 1990s, few investors paid dividends any mind because few stocks were paying them. At the time, investors cared only about capital gains and picking the next high-flying stock with dot-com in the name. Dividends can help cushion the impact of volatile stock prices. According to Standard & Poor’s, dividend income has contributed about a third of the total return for stocks since 1926. We feel defensive sectors, including Consumer Staples and Utilities, are a good place to start.
Stick to the Plan and Keep Saving.
When the market continues to struggle, investing more of your hard earned cash can be difficult to stomach. However, for long-term investors, a downturn is akin to a sale on stocks. You are getting them for cheap. Dollar cost averaging can help you take advantage of cheap stocks. You buy more shares when they are cheaper and less shares when they are expensive. Consistently adding to your savings account can also lessen the emotional toll of a volatile market.
Know Your Road Map.
Even a well-diversified portfolio across multiple asset classes loses value from time to time. Diversification can allow for strong performance on some investments to help offset poor performance of others. We suggest reviewing your asset allocation to make sure it is in order before making any drastic changes. Timing the market is difficult no matter the circumstances. You have to be right not once, but twice: when to buy and when to sell. Extremely volatile markets will magnify the impact of a wrong decision. Take a look at this example from Ibbotson’s: If you invested $1 in the market in 1926 and held it through 2009, your portfolio would be worth almost $2,600. However, if you missed the highest returning months, the value of your initial $1 investment would only be $15.22.
Check Your Rear-View.
While past performance is no indicator or guarantee of future returns, the stock market has historically trended higher. It is helpful to occasionally look back to see how far you have come from when you started investing. If your portfolio is down over the past couple of years, it can be easy to forget the progress that was made in the years running up to the latest downturn. Having a sound investing strategy is half the battle. The other half is sticking to it!
Practice Patience.
When the market seems to be going down the toilet, before flushing out your portfolio, take a step back and breathe. If you feel you should make changes to your portfolio, we suggest doing so gradually. You could invest new money in assets you feel are well-positioned for the future and leave the rest of your portfolio as is. We feel testing the waters with a small percentage of your portfolio and taking gradual steps are great ways to spread your risk over time.
Your Mortgage
The less you spend on housing, the more you will have to spend, save and invest. With interest rates near historical lows, it is a great time to lower your monthly payment and pay off your loan entirely.
Refinance.
If you have not done so already, considering taking advantage of record-low borrowing rates by refinancing. It will cut your monthly mortgage payment and overall loan costs, but remember these tips: Refinancing is a smart financial move if you intend to live in the house for at least three or four more years and your new loan carries an interest rate at least 1% below your current mortgage rate. Online calculators, like the one on Bankrate.com, can help you determine when you will breakeven.
Consider the Drawback.
When you refinance, you will restart your pay-off schedule. For example, if you are 10 years into a 30-year loan, you could end up making payments for 40 years, and your total payments could ultimately exceed the amount you would have paid had you never refinanced. In this case, you could accelerate your repayment schedule to 20 years.
Extra Payments.
Refinancing is not the only option to reduce the cost of your mortgage. You can make extra payments toward the loan principal, which will lower your interest costs in the end. For example, if your rate is 5%, you are probably better off putting extra money toward your mortgage than investing in a bank CD that has a yield of next to nothing. However, do not accelerate your payments if it prevents you from investing in stocks.
The entire staff at Henssler Financial hopes you are successful in meeting your financial goals and have a very prosperous New Year!
Disclosures
This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
