Have you Weeded Your Financial Garden?
Spring has sprung! March is a great time to weed our gardens so the spring flowers can shine through. I weed my gardens, clear out the old growth, and then put down a layer of compost so my flowers will flourish all spring and summer. They are happy, and I am happy.
The same concept applies to your personal finances. Many people neglect their finances because they do not know how to “fix” them, or they rely on their broker or financial adviser to keep their investment accounts in good order. I recommend that all investors know what they own in their investment accounts and why they own it.
If you work with an adviser or broker, I recommend you ask the following questions:
- What is my asset allocation? Is it appropriate for my risk tolerance and goals?
- What are the expenses I am paying? Expenses may include annual expense ratios, commissions, quarterly or annual fees based on a percentage of assets, separate-account management fees, transaction fees, annual account fees, and any other expenses. Fees are often hidden, but they should be fully disclosed if you ask.
- What was the return for my investment accounts in 2017, and what was the average annual return in the past five years and 10 years? How does that compare with the benchmark return based on my asset allocation?
- Are my investments diversified? Do they include U.S. large-cap, mid-cap and small-cap, as well as value and growth investments? Do they include international (developed markets and emerging markets, small and large cap)? Are my bonds diversified (short term, intermediate term, corporate, U.S. government, international)? Are my bonds high quality (not junk; often called high-yield)?
- Are my investments passive (index mutual funds or index ETFs) or active? Or, do I have a combination of passive and active? What is the investment strategy behind the selections?
- If I have a taxable account (which excludes traditional IRAs, Roth IRAs, 401(k)s, and 403(b)s), how tax-efficient are those investments?
Do it yourself
If you manage your own investments, it is important that you know what asset allocation you have chosen (the percentage of equities and fixed income in your investments). The asset allocation should be appropriate for your risk tolerance and goals. You should also be monitoring the performance of your investment accounts. The biggest mistake I see among do-it-your-selfers is that they neglect their investment accounts. Your investments (and future financial security) deserves your attention.
If you want to become more educated about investing, see Chapter 10: Investment Strategies, in my book “The Joy of Financial Security.” Or, consider classic investment books such as “The Only Investment Guide You’ll Ever Need” by Andrew Tobias, “The Millionaire Next Door” and “Millionaire Women Next Door” by Thomas Stanley and William Danko, or “A Random Walk Down Wall Street” by Burton Malkiel.
To monitor specific investments in your accounts, you can use websites such as www.morningstar.com, or go directly to the fund or ETF family’s website. You can review your investments in your 401k through your employer’s 401(k) website.
Prepare for volatility
The U.S. stock market has had healthy returns for the past nine years. Some investors have forgotten how devastating the financial crisis of 2008 and early 2009 was, when the S&P 500 declined over 50 percent. Many people are predicting that a correction may happen soon, but no one knows how severe the correction will be, or when it will occur.
You can find excellent investment information online or in publications such as the Wall Street Journal and the New York Times.
Burton Malkiel, author of “A Random Walk Down Wall Street,” wrote an excellent article that appeared in the Wall Street Journal on Jan. 23, 2018, titled “How to Invest in an Overpriced World.” In his article, Malkiel, who is widely respected in the financial industry, states that U.S. asset classes appear to be overpriced due to strong returns in recent years.
He cites the CAPE (the cycle-adjusted price/earnings ratio) developed by Nobel laureate Robert Shiller. The CAPE was at 34 when he wrote his article, which was a high valuation, exceeded only in 1929 and 2000, prior to stock market crashes. Malkiel uses the CAPE to estimate future stock market returns, and he believes the CAPE “suggests that the 10-year equity rate of return will be barely positive.”
Despite today’s overpriced stock market, Malkiel firmly believes that trying to time the market is futile, so he does not recommend jumping in and out of the market. Instead, he recommends using broad diversification and rebalancing.
Broad diversification means you should have many different asset classes in your portfolio. Specifically, Malkiel recommends having a significant amount of international exposure because international equities are currently not as over-priced as U.S. equities. Malkiel recommends a combination of developed international as well as emerging markets.
Rebalancing is intended to keep your asset allocation steady, and not let the percentage of equities become too high in your investment accounts due to recent strong performance. Last, Malkiel recommends that investors examine their costs and keep them as low as possible.
These are all excellent investment strategies.
We cannot control the stock and bond markets, but we can control our own portfolios. Give your investments the attention they deserve by weeding your investment accounts this spring, clearing out any clutter that is not serving you well, and investing for the long term.