Investment planning goes on all year around. But if you are like most investors, you may not think about your investments on a regular basis. With all of the recent market volatility, I thought this would be a good time to talk about how to review and update your investment plan.
Typically, if you are working with an investment professional, you meet periodically to review your portfolio’s performance. However, you should also review your overall investment plan and strategy at least once per year. Here are three key areas to review. (For more, see: 5 Financial Planning Decisions You Won't Regret.)
1. Review Risk Tolerance and Asset Allocation
Do you understand the amount of risk you are taking in your portfolio and are you comfortable with it? You need to understand your risk tolerance and what makes sense based on your goals and time horizon.
What is your mix of stocks, bonds and cash? Having the appropriate asset allocation is one of the most important decisions you can make. According to research, 90% of portfolio performance comes from being properly allocated (stocks, bonds and cash) and well diversified. Only 10 % comes from the individual investment recommendations.
2. Review Your Investment Policy Statement
An investment policy statement is a document that provides your general investment goals and objectives and describes the strategies that your investment professional should use to meet your objectives. Do you have an investment policy statement? If so, is it still current or does it need to be updated? (For related reading, see: 5 Financial Strategies to Last a Lifetime.)
3. Investment Strategy
It is important to understand your overall investment strategy. Does your portfolio consist of quality investments that are well diversified? Or are all of your eggs in one basket? Ideally, you want to be invested in a range of asset classes. This helps to reduce the overall volatility in your portfolio. In addition to being well diversified, here are a couple of additional strategies to consider:
- Invest for growth - One common mistake some investors make is being too conservative. At least a portion of your portfolio should be invested for growth. Growth means the portion of your portfolio that could potentially appreciate in value and/or provide you with rising income over the long term. The only asset class that has outperformed inflation over the long term is equities
- Mutual funds - One strategy that can provide growth and instant diversification is investing in quality equity mutual funds.
- Consider cost - Be aware of what you are paying to invest in mutual funds. Are you paying an upfront fee? What is the expense ratio? Investing in funds with a low expense ratio translates to a higher investment return.
- Keep a long-term perspective - When creating your investment strategy it is also important to have a long-term perspective. You cannot control the ups and downs of the market but you can control how you react to them. With a solid plan in place, you will be more likely to stick to a long-term strategy and not tempted to sell investments at the wrong time.
Whether you are working with an investment professional or managing your own investments, it is important to schedule a time to review and update your investment plan. This process is key to helping you stay on track to meeting your long-term investment goals. (For more, see: How Women Can Get Their Finances in Order.)