As the year draws to a close, it’s a good time to review your progress toward your financial goals. But on what areas should you focus your attention?
Of course, you may immediately think about whether your investments have done well. When evaluating the performance of their investments for a given year, many people mistakenly think their portfolios should have done just as well as a common market index, such as the Standard & Poor’s 500. But the S&P 500 is essentially a measure of large-company, domestic stocks, and your portfolio probably doesn’t look like that – nor should it, because it’s important to own an investment mix that aligns with your goals, risk tolerance and return objectives. It’s this return objective that you should evaluate over time – not the return of an arbitrary benchmark that isn’t personalized to your goals and risk tolerance.
Your return objective will likely evolve. If you are starting out in your career, you may need your portfolio to be oriented primarily toward growth, which means it may need to be more heavily weighted toward stocks. But if you are retiring in a few years, you may need a more balanced allocation between stocks and bonds, which can address your needs for growth and income.
So, assuming you have created a long-term investment strategy that has a target rate of return for each year, you can review your progress accordingly. If you matched or exceeded that rate this past year, you’re staying on track, but if your return fell short of your desired target, you may need to make some changes. Before doing so, though, you need to understand just why your return was lower than anticipated.
For example, if you owned some stocks that underperformed due to unusual circumstances – and even events such as Hurricanes Harvey and Irma can affect the stock prices of some companies – you may not need to be overly concerned, especially if the fundamentals of the stocks are still sound. On the other hand, if you own some investments that have underperformed for several years, you may need to consider selling them and using the proceeds to explore new investment opportunities.
Investment performance isn’t the only thing you should consider when looking at your financial picture over this past year. What changed in your life? Did you welcome a new child to your family? If so, you may need to respond by increasing your life insurance coverage or opening a college savings account. Did you or your spouse change jobs? You may now have access to a new employer-sponsored retirement account, such as a 401(k), so you’ll need to decide how much money to put into the various investments within this plan. And one change certainly happened this past year: You moved one year closer to retirement. By itself, this may cause you to re-evaluate how much risk you’re willing to tolerate in your investment portfolio, especially if you are within a few years of your planned retirement.
Whether it is the performance of your portfolio or changes in your life, you will find that you always have some reasons to look back at your investment and financial strategies for one year – and to look ahead at moves you can make for the next.