The new year is the season of planning for goals and for many of us, it is crucial to have money be there to meet those goals. Investing is the fuel that can get those funds to the right level, and you do not want to run out of gas. The biggest issue I see with investing is in many cases, the money is not tied to a goal.
On the coaching line, we often get calls from individuals who have cash that they want to invest for the long run but are struggling to find the right investment choice. Conversely, we have received questions from people who have 100% of their investments in the stock market but have reached a point where they need those funds and are now facing a loss if they sell that particular day. Here are some things to do at the beginning of the year to make sure you are in the proper investment position:
Be Clear About Your Goal
As you can imagine, one of the most common questions I receive as a financial planner is, “Where should I invest?” Rather than give them what they are asking for, I typically answer that question with the question “What goal are you investing for?” While this sometimes frustrates the person I’m talking to, answering that question will likely get them closer to their answer rather than me tossing out some stock or ETF.
Investing becomes easier to manage if you are clear about the goal. One framework to help you get clear about your goal is to make them Specific, Measurable, Assignable, Realistic and Time-related also known as SMART. You can find more information on the SMART concept here.
Time Your Investments to Your Goal
The biggest factor in matching the right investment with the right goal is time frame. If you need funds sooner rather than later, you will likely want to stick with more conservative options like savings accounts and short-term bonds. If your goal is 10 years or more away, the stock market has historically rewarded those who took on risk for the long term. (Your mileage may vary.)
If you want to design your own portfolio, you can use a risk tolerance profile to help determine the right investment mix for your situation. If you prefer to be more hands-off, target date funds are designed to help you invest for retirement in a manner that is reasonable and will get more conservative as your goal approaches. You can simply pick the one with the year closest to your expected retirement date, put everything into that one fund since they’re each fully diversified to be a one stop shop, and set it and forget it. It doesn’t get much easier than that.
Monitor Your Investments and Your Goal
Once you have determined the proper investment mix and tools, the next step is to regularly monitor them. This should be the easy part, but this is where many people get off track. For instance, if you keep changing your investment goal from saving for college to paying off debt, it will not bode well for your investments switching from long-term to short term. If your investment goal is constantly changing, make sure your financial foundation is sound. A robust emergency fund can protect you from having to dip into your long-term investments.
Once you have decided on using a particular strategy, you may want to stick with it until you have taken the time to get comfortable with another one. Be particularly cautious if you hear about a hot investment and you see that this investment has outperformed the strategy you determined you are comfortable with. This can lead to chasing returns, which can lead to underperformance, stress, and possibly taxes generated by moving from investment to investment.
This doesn’t mean you should never make changes to your investments. For example, rebalancing your portfolio quarterly or annually can help you maintain your desired level of risk since you’ll sell investments while they’re relatively high in price and purchase more of those that are relatively cheap. For example, if your target is 60% of your portfolio in stocks based on your time frame and risk tolerance, and you now have 70% in stocks after a good run in the stock market, you’re taking on more risk even if it doesn’t feel like it. By reducing your stock allocation back to 60%, you’re taking some of those gains off the table. When the stock market eventually declines, you can use that money in bonds and/or cash to buy stocks while they’re down and bring your stock allocation back up to the 60% target.
A new year is an exciting time to dream about the future. Your investments can be a key part of that. By carefully planning and monitoring your portfolio, you are more likely to make those dreams a reality.