Stock market volatility has rocked many investor’s portfolios since the start of the year. If you are like most Americans, financial planning and investing may not be at the top of your weekend to-do list.
It turns out more Americans spent less time in the last year planning for an IRA investment for their retirement than choosing a restaurant, flat-screen TV or tablet, according to a 2014 survey by the Teachers Insurance and Annuity Association, a financial services group.
Take heart — good financial planning doesn’t have to become another full-time job. Follow these five strategies to keep your financial plan on track, especially when the market is behaving poorly.
“We all have limited resources and unlimited dreams. We have to make choices. If you are not certain how to prioritize, it may be helpful to develop a financial plan, either on your own or with a professional,” says Steve Martin, senior managing advisor at BKD Wealth Advisors in Chicago.
Create a concrete financial plan with specific goals. Implement a plan, which could include automatic payroll deductions into your retirement account with specific allocations to stock and bond investments. Choose a financial goal with a specific number attached to it, perhaps money for a home down payment, a child’s college tuition or your retirement account.
“If you have a strategy for accomplishing specific long-term goals, you’re much more likely to focus on those, as opposed to being thrown off by short-term fluctuations. Very much like how ‘I want to lose weight’ differs from ‘I want to lose 20 pounds within a year’ — having a concrete long-term financial plan can help you stick to your goals,” says Bob Gavlak, certified financial planner and wealth advisor for Strategic Wealth Partners in Columbus, Ohio.
Take your portfolio for a test ride through history. If you put your investment model through a stress test before making an investment, you will understand potential downside risk involved and see if it matches your own personal risk tolerance. “If the historical volatility is too much for you to handle, consider using a more conservative approach that further reduces volatility,” Gavlak says.
Build an adequate cash reserve. An emergency fund with up to six months of living expenses should be one of the first financial goals for a young professional. Without an emergency fund, unintended credit card or other debt could begin to creep into your financial picture as unexpected car or home repairs emerge. Create at least a six-month emergency fund to cover mortgage or rent, utilities, taxes, groceries and car payments in case of a job loss or other unexpected event.
An emergency fund can create a financial and psychological safety net. “People with a comfortable amount of cash in the bank have more control over their lives. They are free to take advantage of opportunities that present themselves, personally and professionally. I have one client who recently came into some money and is getting more recognition at work. She attributes this to being more relaxed, not worried about losing her job, which has positively affected her job performance,” Martin says.
For those already in retirement, the cash reserve number is larger to protect against poor market performance. “A common approach we use with our retired clients is to establish a cash reserve of 12 to 24 months of the amount they need to supplement their income,” Martin says. “The idea of the large cash reserve is that it allows us to shut down the distributions from their investments if the market should drop significantly. They can use the funds in the cash reserve to cover their living expenses until things improve. At that time, we can replenish their cash reserves, and begin taking monthly distributions from their investments.”
Turn off the television. Once you have a solid long-term financial plan in place, which you have tested and feel comfortable with, it is time to turn off the noise. “Often times it can just be best to avoid listening to many of the talking heads on the television. In order to gain viewership, these shows often highlight only good news or only bad news. While it is important to understand market conditions, the day-to-day conversations focus too much on short-term movements and information, and by engaging in that conversation one opens his or herself up to acting emotionally as opposed to sticking to a long-term plan,” Gavlak says.
Selling some investments that have lost value. When you sell an investment for less than you paid for it you may be able to use the loss to reduce your taxes. “You can use the losses to offset taxable gains you may realize during the year,” Martin says. “For example, if you purchase a mutual fund for $1,000 and sell it for $800, the difference of $200 can be used to reduce the taxable gain of another investment you sell for a profit. If you end the tax year with losses in excess of gains, you can deduct up to $3,000 of losses against ordinary income to reduce your taxes.”
If you implement this strategy, be aware of the wash sale rule. “This is where you sell an investment at a loss and buy the same or substantially identical investment shortly before or after. If you are unsure, you should consult your tax professional,” Martin says.
At the end of the day, in order to invest and grow your money there is risk. Learning how to handle that risk may help you reach your longer-term financial goals. “Few of us have all the money we need to be able to achieve all of our financial goals. This is why most of us work, save and invest. And we would like our investments to grow. Market volatility is actually the cost we pay to enjoy the long-term growth of our investments,” Martin says.
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5 Strategies to Keep Your Financial Plan on Track originally appeared on usnews.com
