April is National Financial Literacy Month.
Bangs too short? Or did the style just look better on the model in the magazine? What do you do? You wait it out, do some trimming and maybe vow to pick a different stylist. So what does a bad haircut have to do with your investment portfolio?
If you’re like most of us, your investments got a nasty haircut in this recent recession. Some of you may have cashed out, others may still have unopened statements…afraid to look at the closing balances. But if there was a game plan, like with our bad haircuts, we could deal with our new reality and become proactive.
Here are 6 questions to ask yourself when you open those statements and actually read them.
1. Which investments had the biggest losses?
Comparing my investments to their benchmarks or their competition, did they do better or worse?
2. Do I have any bonds or do I think they are too staid?
As a rule of thumb, my age should represent the percentage of bonds in my portfolio: if I’m 40, then 40% of my portfolio should be in bonds. Generally, stocks and bonds move in opposite directions: stocks up, bonds down; bonds up, stocks down. Having some of each may give greater balance in more market conditions.
3. Are my stocks diversified?
Do I have large, mid- and small caps? Which are growth and which are value or are they a blend? What sectors do they represent and what percentage of the portfolio: ex. Information technology, healthcare, financials, etc.?
4. What is my risk tolerance?
How much retirement money am I comfortable putting at risk or even losing? Investor behavior tells us that people actually feel the pain of loss about twice as strongly as they feel pleasure from gain. Is my risk tolerance today different than before the recession? When the market was going up, I may have invested riskier than today when I may be feeling more conservative. It’s time to get in touch with the real me now that I’ve experienced both up and down markets. Take a quiz; pick one from this web search.
5. What is my investment objective? From lowest risk to highest:
-- Income with Capital Preservation. I don’t want to lose my money and I need income.
-- Income with Moderate Growth. I need income, but I also want some of my money to grow.
-- Growth with Income. I want both income and growth.
-- Growth. I don’t need income and I am willing to be risky, but I want more conservative growth investments.
-- Aggressive Growth. I’ve got time and don’t need income, but I need my investments to grow and I’m willing to take some risks.
6. Now what do I do? Fix that haircut!
Rebalance my portfolio according to my investment objective and risk tolerance.
Continue to save and add to my investments. In one year, take another risk tolerance quiz and rebalance my investments. Has anything changed? For example, I could have gotten a raise, lost my job or have a child starting college.
Each life transition presents an opportunity to revisit your investment decisions so you can reach your goals. So get past your fear of your finances and move forward with this game plan. Start now. If you have questions, feel free to email me at firstname.lastname@example.org.
As a financial consultant, Hollis Page Harman empowers women to take charge of their money to realize their hopes and dreams. As the author of Money Sense for Kids Barron’s), she helps families prepare their children for financial independence. Her wit and call to action make her a sought after speaker on financial literacy. Contact her at http://www.kidsfinance.com.
More by Hollis Page Harman: 5 Ways to Become the CFO of Your Finances