Review your investment strategies

I recently read the book “Everything you need to know about saving for retirement” by Ben Carlson Link to book and enjoyed the simple but not easy suggestions he makes to lead to a strong financial foundation.  I recommend the book for anyone interested in personal finance.  Today I wanted to discuss a few things that were mentioned in the book that everyone should take some time to consider evaluating.  Those three items are: your savings rate, your asset allocation and your investment plan.  These items should be evaluated in that order and that is where they rank in level of importance.  These three things are simple to evaluate but can take time to tweak and get right.  In the paragraphs below I will cover what you should be looking at when you evaluate the three items I mentioned above.

1. Review your Savings Rate

The percentage that you are saving is the single most important metric when you are considering establishing financial independence. This obviously goes hand and hand with your income and spending. Your savings rate is the first step to investing and to becoming financially independent.  The earlier you can start saving the better. This comes in many different forms including saving for retirement, saving for a large purchase, saving for education expenses and saving for health care expenses.  In general, your goal should be to save 15-20% of your gross income.  This can be hard to do for most but can be something that is worked up to. This amount of savings will give you a cushion for when life throws you curves.  Here are some steps you can take to actively increase your savings: treat it like a bill, automatic increase through your retirement plan, ask for a raise.  Mastering a skill and learning how to sell yourself are vitally important. The impact of asking for a getting a raise can pay immense dividends over the course of your career.

2. Review your Asset Allocation

The next most important item to review is your asset allocation. This is your mix of stocks, bonds and cash. This determines the level of risk you are taking in your portfolio. This is a high-level view of your investments. The old adage of investing: the higher risk, the higher potential review, speaks to asset allocation.  The amount of your money that you are looking to grow should be allocated to equities and the amount of money that you are looking to preserve should be allocated to bonds and cash.  Determining your goals, time horizon and risk tolerance are the first steps in determining your asset allocation.  In general, the younger you are the more risk you can afford to take on. This is due to the fact that the longer you stay invested the higher likelihood will be that you will have a positive return, as the chart below demonstrates.  David Swenson, manager of the Yale Endowment fund and author of bestselling book “Unconventional Success, A Foundational Approach to Personal Investment”Link to book he determines that asset allocation is the 3 sources of return behind savings rate and market return. It is also one of the variables that is in your control as an investor. He states that asset allocation will determine 90% of the investors return, therefore, much more emphasis should be placed on your overall allocation than picking stocks.  This is due to the fact that most investors will be in a broadly diversified portfolio.

3. Review your investment plan

Financial writer Nick Murray once said “A portfolio is not, in and of itself, a plan. And a portfolio that is not in service to a plan is just a form of speculation; it can have no other goal than to beat most other people’s portfolios. But “outperformance” isn’t a financial goal.”

The plan is the foundation that drives the implementation of your investment portfolio.  Your investment plan determines expectations on risk and return; therefore, you plan drives how your assets should be allocated.  Someone that is nearing retirement and looking to have their money last the rest of their life should not be trying to keep pace with the returns of the S&P 500 index.  Instead, they will need to have a portion of their portfolio protected from the downside risk of a stock market correction.  Alternatively, a younger investor who is in the early stages of their career needs their money to grow and accumulate over time. Therefore, their plan should be to be properly allocated to risk.  Picking stocks may be more fun to talk about at parties or with your friends but having the right asset allocation and investment plan will lead to long term success.

If you would like to schedule a call or zoom meeting to discuss a review of your investments Click Here

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