Don’t we all?
Believe it or not, January 1, 2011 was more than eight months ago—and needless to say, a lot has happened since we all rang in the New Year. That’s why right now might be the perfect time to revisit those financial resolutions.
What a Year …
Well-known companies like LinkedIn (LNKD), Pandora (P), and Zillow (Z) went public. The economy started to rebound only to lose its footing. Washington debated and debated and then finally voted on the debt ceiling. Then Standard and Poor’s downgraded the U.S. credit rating.
So what’s an investor to do in these uncertain times? Make sure you are still on track with your long-term financial goals.
Here are four things to keep in mind:
1) Review Your Portfolio’s Diversification.
Being truly diversified means more than just buying funds in different asset classes. Remember that investments that sound “different” (like “international” vs. “domestic” stocks) may actually be more correlated to each other than you think. Now’s the time to take a look at the underlying holdings in your portfolio to make sure that you are not doubling up on the same stocks, the same industries, or the same asset classes.
Another thing to consider: you may not want to be heavily invested in the same industry that you work in. For example, a real estate agent may not want to hold Real Estate Investment Trusts (REITs) and an executive with stock options in her publicly-traded company may want to be underweight her industry in her security portfolio.
2) Cut Your Costs Where You Can.
Costs matter. Sure, it’s easy for a 4.00% daily swing in your portfolio to make fund expenses look insignificant. But remember: you get charged fund expenses—regardless of market conditions. Over a working career, an increase of 1.00% per year in fees and expenses can result in a 30.0% reduction in lifetime wealth accumulation. How would you feel if your portfolio dropped another 30% this week? (Let me guess: Your stomach would probably drop with it.) While the incremental impact of your portfolio’s expenses tend to get lost in the turmoil of today’s market volatility—they catch up to you over the long term—and those costs really add up. That’s why it’s important to keep costs as low as you can now—not in 15 or 20 years from now. Speaking of keeping an eye on cost—your 401(k) maybe be charging you fees that you are not aware of—ask your employer (plan sponsor) to provide total expenses for your plan.
3) Beat back inflation … Now. Not later.
Believe it or not, the average mutual fund investor hasn’t been able to keep up with inflation over the past 20 years. If inflation is consistent with long-term averages, in just 10 years you’ll need $135 to purchase goods that cost $100 today. Now think about your retirement portfolio. When you retire, you’ll want a portfolio that provides more purchasing power—not less. That’s why it’s important for your investments to keep up with the rising cost of inflation over the years—or better yet—beat it.
Zvi Bodie, a professor at Boston University, believes that investing heavily in inflation-protected bonds (TIPS) should be the foundation of retirement savings, and he makes a compelling case. TIPS are an important asset class when it comes to retirement, but unfortunately, many 401(k) plans don’t offer them as an investment option. Aside from TIPS, there are some other asset classes that provide inflation protection: Commodities and REITs (in moderation) are both good choices—but once again, commodities and REITs are not widely offered in many 401(k) plans, which means investors need to take matters into their own hands and add them in their IRA’s and other personal accounts.
4) Revisit your risk tolerance.
Does the recent market volatility make you sweat? If the answer is yes, then it’s time to revisit your risk tolerance. If your portfolio has lost more than you consider acceptable in the last week, month, or quarter, you may need to choose a more conservative asset allocation, like low-beta stocks. However, keep in mind that investors tend to get too aggressive in a bull markets and too conservative after a bearish decline—which is exactly the opposite of “buying low and selling high.” This costly behavior is one of the reasons why the average individual investor generates sub-par returns even over extended periods when the market has, in fact, delivered solid returns. That being said, now is the time to spend some time figuring out a risk tolerance that will allow you to sleep soundly at night.
No one can accurately predict how things will stand in the next week, next month or next quarter for the stock market, the economy, or any future IPO. The good news is that long-term term investors have historically been nicely rewarded—without having to time the market. We just need to stay the course, keep their costs low and comes to terms with how much risk they are willing to accept—in both up and down markets.