New Year Brings Opportunity to Review Your Future
by Jim Pierce
In just a few days our mailboxes will be overflowing with year end mutual fund statements, 401(k) reports, and brokerage account performance reviews.
Unfortunately, some investors allow the volume of paper to keep them from measuring the success of their investment plans. Here are a few tips you can use in order to adequately compare the results of your investment decisions against your financial goals.
Know your financial goals.
Set all the statements aside and ask yourself, “What am I trying to accomplish?” Are you saving for retirement? Some have education goals for their dependents. Perhaps own-ing a second home is the target. It is a futile exercise to analyze a particular mutual fund’s performance without knowing the goal associated with that in-vestment. For example, 401(k) plans are generally earmarked as a way to supplement our retirement income. Savings accounts serve short term spending and emergency fund needs. The challenge lies within those brokerage accounts or mutual funds purchased with after-tax money. Satisfaction with these investment’s returns should be measured against financial goals rather than against other unrelated measuring sticks. Assign a financial goal to each of your various investment accounts.
Let’s look at a retirement goal. Social Security will provide a certain level of monthly income at full retirement age. As you seek to provide an adequate level of retirement income, you have many choices as to how to meet that goal. The first tool to consider should be your employer’s retirement plan. Most employers offer some type of retirement savings tool—401(k), 403(b), 457, etc. How- ever, the IRS limits the amount you can contribute to such programs. Looking outside of an employer’s benefit program, you have numerous other options. Individual securities (stocks and bonds), mutual fund investments, fixed and variable annuities, exchange-traded funds (ETFs), and real estate can all be viable ways to reach a retirement income goal. As you evaluate the various options, ask the question, “Will this investment decision provide me with the best opportunity to meet this goal?”
Develop an asset allocation philosophy.
This is a common scenario for a financial advisor. An employee will ask the advisor to counsel them on their 401(k) investments without sharing the details of other retirement accounts, like IRAs and mutual fund accounts. This is similar to asking a doctor to treat a cold system without knowing about the patient’s health history. Each financial goal should have a corresponding asset allocation philosophy. Since each asset class—stocks, bonds, real estate, cash—has an expected level of risk and return, investors can develop a mix of each asset class that relate to the financial goal. Goals that have a time horizon greater than ten years can afford to take the risk of investing in stocks more easily than a short-term goal of less than three years.
Don’t forget about taxes.
There are a number of investment and insurance-related products that offer significant tax advantages. In addition, employer-sponsored plans, Individual Retirement Accounts, and state-sponsored education plans (529) offer valuable tax benefits for investors. Although taxes should not drive your investment decision, it should be a secondary consideration.
Maintain a current summary of all investment assets.
As the mounds of statements come in, create and maintain a list of all investments. Make sure the list includes the financial goal it is assigned to, each underlying investment name and current account balance. Also, be sure to record the gross amount you deposited into each fund. Unless your investment provider supplies a time-weighted performance figure for each investment, you will simply need to record the investment’s rate of return for the calendar year. Keep a running tally of each year’s rate of return. When you list the financial goal assigned to each investment, be sure to express the goal in a dollar amount. In this manner, you will be able to measure objectively how your investments are progressing in their attempt to help you meet your financial goals.
Jim Pierce is Executive Managing Director, Holmes Murphy& Associates.
P | 800.247.7756
E | jpierce@holmesmurphy.com