Commit to your portfolio with these 4 investing “vows”

Posted by Melanie Simons.
As a woman, there’s clearly only one endeavor that warrants a lifetime of loyalty and devotion.
I’m talking, of course, about my portfolio.
Strange as it sounds, your financial portfolio–including bank accounts, retirement plans and other assets that collectively make up your net worth– is a bit like a life partner. And the more committed you are to certain vows (that is, clearly defined goals), the better your prospects for financial–and therefore emotional–security.
Vow #1: Remain faithful. Emotions have always governed our actions–but modern technology takes it to a whole new level. Never has it been so easy to act on every passing whim, whether it’s an unkind text message fired off in anger, a 2 a.m. impulse buy–or a panic-driven asset reallocation.
Stock prices climbed steadily after the Great Crash of 2008 for such a long period that many 403(b) investors got FOMO (fear of missing out) and moved more of their savings into stock funds than they’d initially vowed to. While it’s easy to get swept up by a big euphoric wave, you don’t need to be a surfer to know that eventually, all waves come crashing down.
Earlier this year, in February, the market experienced a long-awaited market correction with the Dow Jones (the most widely-used stock market index) dropping about 4.6% in a single day.
Investors around the country reached out to their advisors and sought reassurance. Financial services websites ran super slow as a slew of investors logged in to check their diminished balances. Afraid of incurring further losses, some made impulsive decisions with just a few panicked clicks, making sweeping changes to their current investment mix or updates to how new contributions would be invested.
While this may have felt “better-late-than-never” prudent or just “cut-your-losses” cathartic, by acting on the negative emotions swirling inside their heads, these investors were potentially throwing the baby out with the bathwater. Dumping stocks means missing out on the big gains that typically follow a market dip.
Some of us are less reflective and analytical by temperament, so it’s crucial you identify your investment risk tolerance and, based on your risk profile, implement an allocation strategy that is every bit as set-in-stone as wedding vows. This way, during times of white-knuckle volatility (of the kind experienced in February), you’re less likely to stray from your goals and make rash changes to your investment mix.
Of course, people change over time. Or at least, their circumstances change. Re-evaluating your risk tolerance is equally as important as identifying it. Therefore, plan to review your own comfort with risk at least once per year, or whenever you face a life change.
In investing, as in love, you need to be careful not to make long-lasting decisions while in the midst of euphoria or anxiety. While a sexy, hot-right-now tech stock might turn your head, a sensible target-date fund might be the better long-term prospect.
Vow #2: Choose location with care–not only in terms of where you live, but where your investments live. Rather than good schools, low crime rate and proximity to work, you need to consider tax status, risk level and liquidity.
Tax status: Ensure that any new investments or contributions are going to the most tax-advantaged account. What that means for really long-term investments is using your employer plan to the max in any given year ($18,500 is the contribution limit for 2018) because the money comes out of your salary before tax, and the IRS is kept at bay for as long as the money stays in the account–however big it grows. Plus, you’ll get the employer-match money that is part of your overall benefits package.
With non-retirement assets, location is a bit less clear-cut because the account type will depend heavily on when you need the money and how much risk you’re willing to take.
Risk level and liquidity: If you’re investing money for other, more immediate purposes, finding a tax-advantaged home isn’t easy (such accounts were set up to encourage long-term saving, after all). If your goal is to afford a down payment on a home within three years, you might consider a short-term, low-risk location, such as a short-term bond fund or 2-to-3-year certificate of deposit.
If your time frame is 10 years, perhaps you can afford to take slightly more risk and possibly consider a tax-advantaged Roth IRA, which allows for withdrawals after five years in certain situations.
And just as certain zip codes are expensive, so are certain investments. Know the internal expense ratios, fees and commissions associated with each of your accounts, understanding that the cheapest locations aren’t always the most desirable.
Vow #3: Check in regularlyin good times and bad. A good marriage requires constant upkeep. Even when the going is good, there’s complacency risk: Your guard is lowered and you get less attentive. An agreement to split the housework 50/50 gets forgotten, and one side gets in the habit of leaving it to the other.
Depending on their location, certain investments grow more than others, making your portfolio unbalanced and lopsided. So if you vowed 10 years ago to maintain a 50/50 mix between stocks and bonds, the equities portion will likely have grown during the unusually long bull market, tilting the balance to 60/40 (too many eggs in the wrong basket). However, with a growing portfolio, complacency can set in, and you may neglect to rebalance on a regular basis or review interest and dividends (to determine if you want them reinvested). Ensuring your portfolio is balanced can be a full-time job, so don’t be shy to ask for help–you don’t have to do it alone.
Vow #4: Till retirement do us part. While most marriages don’t end in divorce, your portfolio must have a built-in withdrawal strategy because that’s the ultimate goal: generating income. There’s an optimal way to distribute your assets and a million suboptimal (or inefficient) ways, namely taking from the wrong location at the wrong time.
A sound distribution process includes deciding the appropriate assets to sell and when. Identify the best sources for each sale as you draw income on a monthly, quarterly or annual basis. If you decide to go with the 4% rule of thumb, it isn’t optimal to just withdraw 4% from each account and each investment.
For example, if you’re retiring tomorrow but have $250,000 in short-term investments, you may consider tapping those alone, allowing your retirement funds to potentially keep growing. Just be mindful of the required minimum distribution rule that kicks in at age 70½, when you’re required to start taking minimum distributions from IRAs, 403(b) and 401(k) accounts (unless they’re Roth accounts).
In short, never stray from set-in-stone goals, choose investments like they were homes, checkin regularly and have a delicate withdrawal strategy. While these vows don’t come with any guarantees, they are traditional, time-honored ways to achieve long-term security and financial flourishing.
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July 30, 2018
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