A brand New Year always inspires people to make a new start. If you are like a lot of people, that new start might include losing weight or getting on top of your finances.
So what can people do to improve their finances and investments? There are five key steps that will help you get your investments financially fit in 2015.
Too many people rely on willpower and a vague goal to get them where they want to go. Telling yourself on January 1 that you want to lose 10 lbs or save more money is a sure-fire route to failure. By what date do you want to lose that weight? How are you going to track your progress? What specific steps are you going to take to save more?
In other words, you need a plan. A single document will do in which you answer the following questions:
– What are you investing / saving for?
– When do you need the money?
– How much risk can you stomach?
– What asset allocation is right for you? (By answering the question on risk and time horizon above, you can decide what your investment allocation should be.)
– What are your return expectations? Most people immediately jump to this section. The reality is that once you answer the time horizon, risk and asset allocation questions, your return expectations are pretty well defined. Chasing higher return always comes with higher risk.
– What are the appropriate investments for your portfolio? Individual stocks? Mutual Funds? Index funds? How much will you invest? How often?
– How often will you review your portfolio performance and your changing needs and objectives?
– Who is your adviser? A good adviser has the technical skills to provide you with the necessary knowledge, but more importantly, has your trust. He or she will help you to stick with your plan in difficult times.
If you choose your investments based on what your friends are doing or what you overheard at that holiday party, you are virtually guaranteeing yourself a lot of tears and, most likely, a sharp drop in your portfolio value. So how should one invest?
If you haven't done so already, make your investment plan. Most importantly, your plan should honestly identify the risk that you are able to take and the time horizon that you are investing for. As the saying goes, "if you fail to plan, you plan to fail."Having created your plan, slept on it and reviewed it (at the very least with your partner and/or professional adviser), you are now ready to put the plan in action. Depending on the investment choices you specified in your plan, you may have or need to open an account with a mutual fund provider, an investment-counseling firm, a full-service brokerage or an online discount broker.
Now you are ready to execute. That means you buy the investments you identified in your plan through the platform you have selected. Don't try to time the market. It will end up costing you more than you think.
You have created your investment plan, set up your investment accounts and actually started making investments. And then it happens … A friend gives you a "can't miss" stock tip. Volatility hits the markets. Interest rates go up. One of the most important (and most difficult) factors in successful investing is to stay true to your plan. Don't second-guess yourself, and don't let others mess with your head. Keep in mind that the plan you created is for the longer term and you fully anticipated that there would be bumps along the way when you created it.
Nothing stays the same, so your plan should be flexible. Maybe you got a big raise, so you can save more. Maybe your retirement plans changed. Perhaps you find that you really can't handle as much risk as you initially thought. All are good reasons to review.
What does it mean to review your plan? It means that you should to sit down regularly to review:
– Your personal circumstances, as in income, expenses or extraordinary outlays;
– Your risk profile, as your tolerance to risk can change;
– Your goals and objectives, which may have changed over time;
– Your portfolio, as changes in any of the other three items will mean changes to your plan and how your investment portfolio looks. If your plan changes, your investment portfolio will change. If your plan has not changed, then you still need to evaluate each component of your investment portfolio and see if it is doing what it was supposed to do.
I would recommend, at minimum, reviewing your portfolio together with your adviser or provider at least once a year.
Sounds easy enough, doesn't it? And for once, it is. If you have followed the previous four steps religiously it is now a few years later and you should be looking over your portfolio and your investment plan with a good deal of satisfaction because you have now achieved financial fitness.
Sam Sivarajan is head of investments with Manulife Private Wealth