By Barry Rabinowitz
WHAT'S YOUR FINANCIAL PLAN?
Over the past two years we have been on a roller coaster ride in the financial markets, and have seen the major stock market indices fall to a 12 year low, then rebound almost 100%. Daily moves of over 100 points have been common, and with the market off close to 20% from the recent highs, many individuals are wondering about a replay of the 2008 bear market.
What should investor's be doing: Now is a good time to be reviewing your asset allocation, ie., the mix of cash, equities and bonds in your portfolio. Assuming that nothing has changed, you have a diversified portfolio, and your investment allocation adequately reflects your goals, objectives and risk tolerance, you should be "staying the course."
History shows that selling in a panic, or letting your emotions drive your investment decisions, is a recipe for disaster. In fact, the major reason investors don't earn market returns, is that they buy high and sell low, and convert all their assets to cash during a market downturn. According to Dalbar Inc., a financial research firm, for the 20 year period ending December 31, 2010, the S&P averaged a yearly compound return of 9%. However, the average stock fund investor, during that same time, averaged only 3.8% a year, as they switched in and out of funds every 3-4 years. That was barely enough to beat inflation, which averaged almost 3% annually over that period.
What's my plan? If you've worked with a financial planner, such as a Certified Financial Planner professional, CFP®, you should be able to articulate those goals all by yourself or refer to an Investment Policy Statement you made together. Your Investment Policy Statement should be relied on to keep you focused, especially in volatile times like today. All wealthy investors and large successful endowments, ie., Harvard and Yale, operate with an Investment Policy Statement. Much of the riskiest investing, overbuying and panic selling during the 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long term specific goals, such as retirement.
You pay a financial planner to devise a financial strategy that matches your risk tolerance and long term financial goals. No, there is absolutely no way to guarantee that you will never lose money. But if a plan truly matches you, the noise shouldn't make a difference, especially if you don't need the money today.
What's my risk tolerance? At your meeting with a planner, you should have discussed a number of questions about how you handle risk and what your expectations about investment returns were. You want to be certain your investments reflect your time horizon, and risk tolerance.
Am I diversified? Diversification is one of the means that you can employ to reduce market risk and volatility. Are you diversified among all the asset categories?
Do you own any bonds in your account? If you do, are they of the highest quality, and are they laddered? Many investors lost money in their bond accounts because they were not of the highest quality and/or used leverage to enhance their yields. Due to fear in the markets, municipals, which are tax free, are actually yielding more than US Government securities, which are fully taxable. Are you taking advantage of this anomaly to earn high quality tax free income?
Cash Reserves? With all the uncertainty in the economy and the markets, do you have an emergency fund of at least one- two years living expenses? You don't want to be in the position of having to liquidate securities in a down market.
Should you keep investing? Definitely. Markets go up and also go down, but over time the markets go up more than they go down. We are going through some rough weather in the economy and the markets; we have had rough periods in the past, and we will encounter rough periods in the future.
If you are worried about the market and your investments, there is no reason you shouldn't call your planner to calm your nerves and confirm what you are doing.
If your planner has not discussed any of the above with you, maybe it's time to find a new planner. And if you have never talked to a planner before, now might be a pretty good time to start.
Article Source: http://EzineArticles.com/6552727
What should investor's be doing: Now is a good time to be reviewing your asset allocation, ie., the mix of cash, equities and bonds in your portfolio. Assuming that nothing has changed, you have a diversified portfolio, and your investment allocation adequately reflects your goals, objectives and risk tolerance, you should be "staying the course."
History shows that selling in a panic, or letting your emotions drive your investment decisions, is a recipe for disaster. In fact, the major reason investors don't earn market returns, is that they buy high and sell low, and convert all their assets to cash during a market downturn. According to Dalbar Inc., a financial research firm, for the 20 year period ending December 31, 2010, the S&P averaged a yearly compound return of 9%. However, the average stock fund investor, during that same time, averaged only 3.8% a year, as they switched in and out of funds every 3-4 years. That was barely enough to beat inflation, which averaged almost 3% annually over that period.
What's my plan? If you've worked with a financial planner, such as a Certified Financial Planner professional, CFP®, you should be able to articulate those goals all by yourself or refer to an Investment Policy Statement you made together. Your Investment Policy Statement should be relied on to keep you focused, especially in volatile times like today. All wealthy investors and large successful endowments, ie., Harvard and Yale, operate with an Investment Policy Statement. Much of the riskiest investing, overbuying and panic selling during the 1990s and early 2000s could have been avoided if individual investors had sought advice for achieving long term specific goals, such as retirement.
You pay a financial planner to devise a financial strategy that matches your risk tolerance and long term financial goals. No, there is absolutely no way to guarantee that you will never lose money. But if a plan truly matches you, the noise shouldn't make a difference, especially if you don't need the money today.
What's my risk tolerance? At your meeting with a planner, you should have discussed a number of questions about how you handle risk and what your expectations about investment returns were. You want to be certain your investments reflect your time horizon, and risk tolerance.
Am I diversified? Diversification is one of the means that you can employ to reduce market risk and volatility. Are you diversified among all the asset categories?
Do you own any bonds in your account? If you do, are they of the highest quality, and are they laddered? Many investors lost money in their bond accounts because they were not of the highest quality and/or used leverage to enhance their yields. Due to fear in the markets, municipals, which are tax free, are actually yielding more than US Government securities, which are fully taxable. Are you taking advantage of this anomaly to earn high quality tax free income?
Cash Reserves? With all the uncertainty in the economy and the markets, do you have an emergency fund of at least one- two years living expenses? You don't want to be in the position of having to liquidate securities in a down market.
Should you keep investing? Definitely. Markets go up and also go down, but over time the markets go up more than they go down. We are going through some rough weather in the economy and the markets; we have had rough periods in the past, and we will encounter rough periods in the future.
If you are worried about the market and your investments, there is no reason you shouldn't call your planner to calm your nerves and confirm what you are doing.
If your planner has not discussed any of the above with you, maybe it's time to find a new planner. And if you have never talked to a planner before, now might be a pretty good time to start.
Article Source: http://EzineArticles.com/6552727
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