Money Monday: Keep Your Investments on Track – It’s Easier Than You Think!
© Tom Oliveira | Dreamstime.comIt's the last week to enter to win a signed copy of 30-Minute Money Solutions by Christine Benz today! It’s easy – just post a comment following today’s Money Monday post and you’re entered to win!
If you've ever struggled to get off the couch and get something done on a Saturday afternoon (who knew those Kardashian sisters could be so fascinating?), you know what a powerful force inertia can be.
And so it goes for investing. People often struggle to get their investment plans up and running in the first place, frequently opting to do nothing rather than navigate what can be a bewildering array of choices. To help you combat that natural tendency to sit still, I provided you with some quick and easy ways to get started with investing in last week's post.
Many individuals aren't sure of what they need to do to keep their portfolios on track once they've started investing. Some do nothing (there's that inertia again!), while others are too active, making changes when the market is up, down, or sideways. A policy of benign neglect is better than being too hands-on with your investments, making changes with every market hiccup. But neither strategy is optimal.
Instead, the best policy is to have a well-defined approach to managing your investments – essentially a blueprint that outlines what you want your investments to do for you, how often you'll check up on what you've got, and when you’ll make changes.
Keep Your Emotions Under Control
The key advantage of creating such a framework is that it keeps you from getting whipped around by your emotions. You may still feel like selling when the stock market is touching new lows every day and account values are dropping lower, as was the case in 2008 and early 2009. But if you’ve created a system for evaluating your investments and have decided in advance that you’ll only make changes once a year, you can use that as a check on your emotions. And the more you can keep your emotions under control, the more successful you’ll be as an investor.
Create an Investment Policy Statement That Works for YOU and Your Goals
Corporations and professional investors create elaborate multipage “investment policy statements” to help them oversee their portfolios, but yours doesn’t have to be that fancy. This worksheet from my book 30-Minute Money Solutions can provide a good starting point, but you don’t need to fill out each and every line. Just make sure you answer the following questions.
1) What are these investments for? (If you have separate pots of money geared toward separate goals—a 401(k) and/or IRA for retirement, for example, as well as a down payment fund for a condo you’d eventually like to buy, you’ll want to create separate documents for each pool of money.) List target savings amounts as well as target dates for when you plan to have the money together.
2) How much you have saved so far, along with how much you plan to save on an ongoing basis.
3) How much you’ll hold in stocks, bonds, and cash. If you have no idea, consider the following guidelines:
For retirement savings, one useful rule of thumb is to subtract your age from 100, and that’s the amount to hold in stocks. Hold the rest in bonds.
For goals that you expect to fund within the next few years, such as grad school or a down payment on a house or car, you need to keep the money as safe as you can, so 100% cash is the way to go. (By “cash,” I mean a money market fund or account, CD, or checking or savings account.) No, you won’t earn much of a return on your money, but for short-term goals, not losing what you’ve saved so far is more important than bulking up.
For in-between financial goals – those that you expect to achieve within the next five to 10 years – a combination of stocks and (mostly) bonds makes sense. As an example, all-in-one funds like Dodge & Cox Balanced can make sense in this role.
4) Criteria that you expect your holdings to adhere to. Focus on factors such as:
Experienced fund manager
Low costs. A reasonable guideline for stock mutual funds is an expense ratio of less than 1.0%; for bond funds, less than 0.75%.
Broad diversification
Ranks within top 50% of peer group over past five years
5) How often you’ll check up on your portfolio: semiannually or annually is plenty!
6) When you’ll make changes. A good, hands-off framework is to make changes only if:
Your Money Monday Task for This Week:
Use Morningstar’s Instant X-Ray tool to get a view of how your investments are situated right now. Enter the name of each of your stocks or funds into the tool, as well as how much you have in each. Then click “Show Instant X-Ray” to see how much you have in stocks, bonds, and cash.
Seeing how you’re positioned now can be a good starting point for creating YOUR investment policy statement, and keep moving ahead to reach your investing goals.
Guest post by Christine Benz, director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-By-Step Guide to Managing Your Finances (Wiley, 2010).
Don't forget to enter to win a signed copy of 30-Minute Money Solutions by Christine Benz today! It’s easy – just post a comment following today’s Money Monday post and you’re entered to win!
Leslie Banks
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