The New Year isn't only the time to lose weight or make new friends – it's also about setting financial resolutions. While curbing debt and saving more should be on top of the list, so should rebalancing your investment portfolio and budgeting, according to Charles Schwab, the San Francisco-based discount broker. Rebalancing is particularly important in this market, as stocks have been setting highs all year, throwing even the best of investment plans out of whack.
In a blog post, Rob Williams, director of income planning for the Schwab Center for Financial Research, said that the end of the year is the ideal time to optimize investment portfolios by creating a plan and sticking to it, adjusting it along the way. "After committing to a savings plan, how you invest is your next most important decision," wrote Williams in the post. "Have a targeted asset allocation – that is, the overall mix of stocks, bonds and cash in your portfolio – that you're comfortable with, even in a down market. Make sure it's still in sync with your long-term goals, risk tolerance and time frame. The longer your time horizon, the more time you'll have to benefit from up or down markets."
According to Williams, it's important for investors to diversify their investments even within different asset classes. After all, being diversified will lower your risk if one industry implodes, and diversification plays a key role in reaching your long-term investment goals. The Charles Schwab Corporation (SCHW) executive pointed to mutual funds and exchange-traded funds as two ways to gain exposure to a basket of stocks in different asset classes, boosting the overall diversification strategy.
In order to reach your investment goals, you'll also have to rebalance the portfolio from time to time to ensure that the investments are in line with your risk and diversification strategies. Williams says twice a year should do it. "Remember, the long-term progress that you make toward your goals is more important than short-term portfolio performance. As you approach a savings goal, such as the beginning of a child's education or retirement, begin to reduce investment risk, if appropriate, so you don't have to sell more volatility investments, such as stocks, when you need them," said Williams.
On the budgeting front, the Schwab executive said the idea is to create a plan that you can live with as you enter different stages of your life, being mindful of your financial goals. If putting away money for retirement is the aim, then Williams says to save 10% to 15% of pretax income, including any contributions to an employer-sponsored 401(k) plan. You should then add 10% for every decade you missed saving for retirement to ensure that there aren't shortfalls when you do enter your golden years. Paying yourself before you start saving can also ensure that you stick to your savings and budgeting plan.