Re-evaluating your investment strategies for 2011
By Kristi Ellington
LPL Financial
There’s an old adage that says
”
Most folks spend more time planning their annual vacations than
they do their annual finances.
”
As we enter a new year, and with it a new tax season, I find
this is a popular time to conduct your annual financial check-up as
you’re in the midst of tax preparation and have all your current
documents pulled and in one place.
By Kristi Ellington
LPL Financial
There’s an old adage that says “Most folks spend more time planning their annual vacations than they do their annual finances.” As we enter a new year, and with it a new tax season, I find this is a popular time to conduct your annual financial check-up as you’re in the midst of tax preparation and have all your current documents pulled and in one place.
Are you appropriately positioned to enter 2011?
After a year of positive numbers across the board in the stock market, we are seeing the recoveries of many losses from earlier in the decade. Looking at the final 2010 results of the major indices, we see the Dow Jones Industrial Average clocked in with a return of 11.02 percent – its second annual rise in a row and fourth in the past five years. The S&P 500, a broader index, was up 12.78 percent in 2010, and the Nasdaq climbed 16.9 percent. In the bond markets, we saw the Barclays Aggregate Bond Index, an index of high-quality bonds, return 6.5 percent. That said, markets go up and markets go down, i.e. markets are volatile – this can work both for and against you. As part of your investment review, it’s important to reassess your risk tolerance on a regular basis.
You may want to discuss with your advisor whether a more conservative, moderate or aggressive allocation will best help you meet short and long-term goals. For instance, bonds and money market accounts have historically worked well for shorter-term goals, but in the long term they have not been effective at keeping up with inflation.
Were there any changes to your overall financial position?
Re-visit your original investment goals, time horizons, risk tolerance and priorities. Have your objectives or circumstances changed? If so, does this alter your asset allocation mix (how much of your money you invest in stocks, bonds, and cash/money markets)?
As we meander through life, we have a variety of specific time horizons; for example, goals to purchase a home in three to five years, send kids to college in 10 years, retire at age 65. When children or grandchildren are born, priorities may change. Young adults typically have many financial goals, however as we age many of those goals are met, or modified, depending on our circumstances, and our financial strategies need to be updated to reflect any changes.
Were there any changes in your personal life?
This is a real hot button today with the job market what it is… if you have not personally been affected by it, you are likely to have family members or friends who have. Unexpected financial triggers include: a lay off, a severance/buyout offer or an early retirement. Perhaps a need has arisen to help a child with college expenses, a grown child with temporary financial assistance or you may have parents who are in need if some level of financial support. Other events could be a marriage, a divorce, birth of a child or grandchild. Any of these changes will require a reassessment of your financial needs and may involve an adjustment to your investment mix.
How is your tolerance for risk these days?
Risk tolerance can be described as your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. During down markets many investors move from being an aggressive investor to a conservative investor. During up markets many investors move from being a conservative investor to an aggressive investor. Assessing your own risk tolerance can be an emotional endeavor, however talking with your advisor and exploring the pros and cons of various investments can help you make a well-informed and less emotional assessment.
Are you on track to meet your retirement goals in time?
With market declines and job market challenges, many folks are finding that they are not on track – especially those planning to retire in the next five to 10 years. Some strategies that are being used today include:
Delaying retirement. As motivated as you are to reach that magical date working a few more years may accomplish a lot. First, by getting a paycheck you are not drawing down retirement funds to live on. Second, you can use those years to continue building your retirement fund. Third, delaying Social Security benefits will result in a higher lifetime benefit. It may be well worth hanging in there a little longer.
Working part time. The extra income may help you preserve more of your retirement savings for later years. There may also be an added psychological benefit of transitioning into retirement gradually, maintaining regular social interaction and perhaps even finding part-time work in an area you really enjoy.
Reducing your spending. It’s not fun at first glance, however you may find ways to get creative that can happily surprise you. A few of my clients who love to travel have discovered Road Scholar, www.roadscholar.com, where they find travel less expensive, more meaningful, and have made some great friends along the way.
Try to max out retirement savings opportunities while you can. In 2011 you can contribute $5,000 to an IRA; if you are over 50 you can make a catch-up contribution of $1,000 for a total of $6,000. In a 401(k) plan you can contribute $16,500; the catch up contribution is $5,500 for a total of $22,000.
Are your current investments in line with your original asset allocation goals?
Your investments will generally shift over time as a natural progression of the markets. Asset allocation is the practice of putting a certain percentage of money into stocks, bonds, or cash – for example, 60/40 percent stock/bond. Over time, this can change as the stock and bond markets do not move in tandem – so perhaps you now have a mix of 50/50 percent stock/bond. Rebalancing the portfolio in this instance would mean selling some of the stocks (selling high) and buying more bonds (buying low). Over time, this practice may actually add to your overall performance. More importantly, it means your asset allocation mix is in line with your goals and risk tolerance. If it’s been more than a year since you last reviewed your investment mix you may need to rebalance your portfolio.
Did you have any investment related taxable events in 2010?
Part of your investment review will often include a discussion with your tax advisor, particularly if you have sold any securities or withdrawn money from a retirement account. Talk to your tax adviser about this and other tax issues.
What should you bring when you meet with your adviser?
To ensure that your advisor can give you the best possible advice, be prepared with updated documents so that they can clearly see your “big picture.”
Include current investment statements for retirement accounts (IRAs, 401(k)s, etc.), personal investment accounts, college savings accounts, and bank savings accounts. Be able to provide details on your current income and company pensions; bring your most recent Social Security benefit statement and information on any life and/or long term care insurance policies.
Be prepared to review and update your beneficiary designations; have each beneficiary’s full name, date of birth and Social Security number. This is one area that is often overlooked, and as life events change not reviewing this routinely could result in some unhappy surprises.
Just a few weeks into January and I’ve already had several conversations with clients who are “cleaning house,” including their desks and file cabinets. Again, this is a great time of year to meet with your financial adviser to see if your investment strategy needs any tweaking, while you’re “cleaning house” and preparing for your annual tax meeting.
Kristi Ellington is a local independent financial consultant who has been providing financial guidance to her clients for the past sixteen years after a twelve year career in banking. She is a registered representative with and securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. She can be reached in her Gilroy office at 408-848-0874, her Hollister office at 831-634-1144, or at www.kristiellington.com.
