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As we see record highs occurring in the equity markets, coupled with year-end and national elections, it’s an ideal time to review your portfolios.  We recommend a holistic approach, and evaluate all of your holdings, not just one account such as your 401 (k). In other words,  take stock of all your investments, and periodically consider your overall asset allocation.

According to Forbes magazine, “Balanced investing is part of a balanced life.”  They go on to say “A buy, hold and rebalance strategy using broad market index funds is one of the simplest and most effective ways to diversify and prosper over the long-term. It helps keeps us sane and our portfolios healthy during good times and bad.”

In laymen’s terms, what does this mean.  The first step is to take an accounting of ALL your investments.  Make a list of all your accounts, pull out all your statements, or go online to get the information.  We recommend doing this at the end of a quarter, and every quarter after.  It’s surprising to us how many people don’t do this, and if you find it overwhelming we encourage you to seek professional help.  It’s not as expensive as you might think, and you have a better chance of avoiding  expensive mistakes.

The second step is to run a quick evaluation of how much these various accounts/investments are worth.  This is an important element in sound financial planning, as well as creating a scorecard for future reference.

The third step is to break down where each of your accounts are invested.  A good start is to break it down into how many investments are in stocks, fixed income, and cash.  You then total how much you have and what percentage is in each of these 3 asset classes.  For those more detail-oriented, these 3 asset classes can be broken down into more categories or classes within the three.  This is what a professional financial planner can assist you with.  There is also software that can help you with this if you chose to do it yourself.

Once you arrive at this point, judgment is required to determine whether you have proper balance.  According to a New York Times article, “This is the single most important decision we can make.”

Why is this important?  According to this same article, “How much of our portfolio we put in stocks drives the level of risk we are exposed to and our potential returns. This process is often called asset allocation.”

In the most general sense, stocks are the riskiest asset class, fixed income/bonds is the second riskiest, and cash the least risky.  Let’s say you have the following portfolio that totals at the beginning of the year:

  • $40,000 in Stocks – 40%
  • $40,000 in Bonds – 40%
  • $20,000 in Cash – 20%

Let’s say in that year stocks grew at 15%, Bonds at 4%, and Cash at .5%.  Your portfolio at year-end would be worth $107,700 and would look like this:

  • $46,000 in Stocks – 43%
  • $41,600 in Bonds – 39%
  • $20,100 in Cash – 19%

As you can see, your asset allocations have shifted, and you now have a generally riskier portfolio.  This is a very simple example, and we haven’t talked about what allocation parameters are appropriate for a given situation.  This varies from person to person, and there are many variables that go into that decision.  An example of some are your age, your time horizon, how much risk you are emotionally comfortable with, what your future goals are, etc.  There are numerous tools to do a self-diagnosis on what an appropriate asset allocation strategy is for you.

We are all about balance at Financial Freedom Planners!

Some resources for help and tools are your 401 (k) provider, online calculators such as Vanguard, and Bankrate, or a CERTIFIED FINANCIAL PLANNER™.

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