If your personal status changes, so should your investment strategy.
From time to time it is a good idea to review your retirement portfolio and other investments. It is tempting to just “leave well enough alone” and most investment managers are more than happy to encourage that attitude from their clients.
However, it would be an excellent strategy if at least annually you and your spouse or significant other sit down together and review your status and goals. It is a given that of you and your investment manager, you are the one who is more interested and more familiar with your own priorities, goals, and personal status, not to mention, more interested in the portfolio. So before having an annual meeting with your investment manager, (of course you want to require this of any investment firm) make it essential that you review your own needs first so that he or she is fully informed and can customize investments for your unique needs.
So where do you start with you personally?
What is your health status? Are you facing any potentially significant medical expenses uncovered by insurance?
What is your family status? Do your children, grandchildren, or parents have any needs you will be looking to help meet? E.g. College tuitions, change in residences, change in employment, etc.
What are your goals for this year, for the next five years? Are you planning a major purchase like a car, new or vacation home, home renovations/remodeling? Are you relocating? Are you planning to fulfill one or more of your “bucket list” items? Will any or all of them require a large amount of cash?
Are there unused or under used items you want to donate to your church, favorite charity, or give to your heirs? Or even gifts of cash, stocks, or art? If so what are the tax implications for you and for the recipient?
What debts do you have? Auto, mortgage, personal, credit card, etc.
What were your annual expenses for the past twelve months?
What should your investment profile look like?
The answer to this is somewhat determined by the answers you made above, but also should include some of the following for your own peace of mind:
Do you have a sufficient “rainy day” fund? This is a portion of your funds that are easily accessed in case of emergency. This amount should be in the neighborhood of at least one quarter of your annual expenses and perhaps as much as one half depending on the amount of debt you have to service.
Are your debts paid off? If not, move to get these paid off after you establish your “rainy day” fund. Once paid off, adjust your life style so that you live within your means and do not incur new or additional debt. Have you cosigned a loan (college tuition, first home) for children or others?
Do you have adequate insurance? Health insurance supplements, long-term care insurance, life, home, and auto insurance?
Once these are in order, you can look at your investments more clearly.
Now let’s look briefly at what you might consider for investments and why.
It is a given that higher returns are based on higher risks. So how risky do you want to be? Can you afford to lose 10%, 25%, 50% or more of your investments to see a big return? Also as a fraud preventative, remember the other given “If it’s too good to be true, it probably is”. All investments carry some form of risk. Even if you put your money under your mattress, you risk theft or loss due to inflation. Insured bank investments carry the risk of delay in reimbursement until your claim is settled.
You need you look at what percentage of your investments will be lower risks and lower rewards and what percentage will be higher risks and higher rewards.
Once you’ve agreed to the blend of risk and reward you can look at where to invest and discuss the relative merits with you investment manager.
Some areas to consider including in your profile (In ascending risk factor):
Treasury Bonds, Certificates of Deposit, Government Bonds, Corporate Bonds, Preferred Stock, Common Stock, Options/Futures, Metals.
One closing note, if there is a spouse or significant other in your life, be sure that you agree on your goals and priorities. All too often there is an incorrect assumption that you are both in agreement about these things, when that is not the case and can lead to serious disagreements.
At a future time, we will explore how to find a good investment counselor and the differences in fees charged for handling your investments.