Since we’re in the beginning of a new year, I thought it would be nice to focus on a few resolutions that may be easier to stick with than many of the traditional January vows we make for ourselves. You do not have to overcome big obstacles to follow these tenets of sound financial and investment discipline—just develop a few good habits.
Re-evaluate your portfolio
Analyze your portfolio holdings considering your investment objectives, tolerance for risk, investment experience, life stage and expectations for the capital markets. If you have invested heavily in stocks and are approaching retirement age, you may consider reallocating a portion of your portfolio into fixed income.
A fixed income allocation can include high-quality U.S. corporate and government bonds, international bonds and higher yielding “junk” bonds. While their long-term return potential may not be as high as stocks, neither is their short-term volatility.
Take the long-term view
The quality of a company, investment manager or mutual fund family needs to be analyzed before investment. This includes research of its track record over a full market cycle—typically defined as five to10 years. Resist judging an investment solely by last year’s return, and remember that past performance is no guarantee of future results.
Invest in a blend of securities
One time-tested way to help reduce risk in a portfolio is to diversify. This means holding different asset classes, in different allocations, relative to your profile and the anticipated direction of the markets. Investors approaching or already of retirement age need to keep in mind that inflation erodes the returns on short-term securities.
For example, if you need $75,000 to live on today, you will need $101,777 in just 10 years, assuming the long-term average of 3.1 percent inflation. Maintaining a portion of a portfolio in equities has historically improved the chances of keeping total return (yield plus capital gains) ahead of inflation. Of course, this strategy does not protect against loss.
Keep an emergency fund
Be prepared for unexpected cash needs: emergency medical bills, child care, home repairs and living expenses in case of a sudden job loss. Always keep a portion of your portfolio liquid. I recommend six months living expenses be kept in cash or cash equivalents for a single-income household and three months for a two-income household.
Separately, discuss with your human resources department if a Flexible Spending Account, a tax-advantaged financial account for medical and dependant care expenses, would be suitable for your family.
Leave a legacy
It is a good idea to consider investment and gifting strategies that allow you to leave an estate (not to mention reducing your taxable estate) for your children, grandchildren, other heirs or a favorite charity as part of your overall financial plan.
A conversation with your estate attorney could help your beneficiaries eliminate probate (a lengthy procedure whereby a court handles distribution of assets not designated to a beneficiary) and other estate planning issues, including whether the use of trusts would benefit your family.
If you are a younger parent, do you have a will in place, for example, to provide guardianship instructions for your children’s care should you pass on while they are still minors?
Save time and money
We never seem to have enough time. Take advantage of the services offered by your brokerage firm. You could save yourself the trouble of delivering stocks and bonds to your financial consultant each time you’re ready to sell an investment by having your securities held in the firm’s street name. When you’re ready to sell, just call your financial adviser.
Or, consider consolidating your banking and investments into a central financial brokerage account. You may be able to manage all your investing, savings, borrowing and spending in a single account. And, some brokerage firms may supply you with an ATM card for convenient access to your funds.
A financial plan that includes the above, periodically monitored with the help of your financial adviser, could help make keeping your financial resolutions painless in 2009.
Ben Proctor is a Certified Financial Planner and Vice President-Wealth Management with Smith Barney’s Greenspring Station office. He may be reached at 410-494-8097 or by visiting his web site at www.fa.smithbarney.com/benproctor.