Is Your Investment Portfolio Making You Sick?


When you exercise, eat healthy, watch your weight, and get age-appropriate screening and vaccinations, your body is in a much better position to bounce back from whatever virus, accident or injury may come along.

Similarly, focusing on your financial fitness can help build immunities to fight whatever monetary ailments may come along – such as the tumultuous stock market that we are seeing now.

This volatility can make one feeling panicky, anxious and even a little queasy. But there is a remedy. Here are the things I recommend to achieve financial strength and health.

Review your budget
That’s right, I actually uttered the b-word. It never ceases to amaze me how many folks—on all ends of the income spectrum—fail to put together even a basic budget. I can’t tell you how many clients have asked, even mockingly, “Surely you don’t need to do a budget, right?”

Sorry to burst your bubble, but even a Certified Financial Planner™ does a monthly budget. While you don’t have to be down to the penny in every category, once you start to track and write down what you’re spending, you’ll most likely be surprised at where the money is actually going.

Something that has worked for our family is to build in a goals-based component, usually around travel or some other milestone we want to achieve. If you’re looking to take that ski vacation next year, it will be a lot easier if you start putting money away regularly now.

Review your distribution/contribution rate
If you are still working, how much are you contributing to your 401(k)? Most employers will offer to match contributions dollar-for-dollar up to a certain amount, such as 3% of your income. Taking advantage of this matching amount is a no-brainer; it is essentially equivalent to a 100% investment return. You’d be surprised how many people don’t take advantage of this “free” money.
If you are retired, then you are likely in the distribution phase from your investment portfolio. Are you taking money out at a sustainable rate that will not eventually deplete your investments? You may have been planning on living off the income generated by the portfolio, but the persistently low interest rate environment we have been in may have thrown a wrench into this strategy.

Furthermore, when calculating the annual withdrawal rate, make sure to include not only the money that comes out regularly each month, but also the lump sum distributions. When accounting for these “one-time” withdrawals, you may find out that your true distribution rate is unsustainable over the long term.

Review your asset allocation
You have probably heard the advice to re-balance your portfolio on a regular basis, but are you really doing it? If so, how often?

Studies have consistently shown over decades that left to their own devices, most investors will not only neglect to properly re-balance their portfolio, but will actually do the opposite—they will buy more of what has recently done well.

The whole point of re-balancing is to “buy low and sell high,” a very easy concept to grasp on paper, but very difficult to implement, especially in times of heightened market volatility.

Also, this should present a good opportunity to evaluate the appropriateness of your long-term asset allocation target. It’s been very easy the last few years to convince oneself to have a portfolio heavy in stocks, because they have done so well.

Conversely, it could also be tempting to be a prisoner of the moment and abandon stocks at this time of turbulence. Think about not only what your long-term asset allocation target is, but more importantly what caused you to establish that target.

Review your debt
We’ve all heard of the concept of “good” and “bad” debt. Debt related to your primary residence, such as a mortgage or home equity loan, is usually considered to be the best form of borrowing, while high-cost debt, such as those on credit cards, is widely deemed
the worst.

If you are carrying credit card debt, get rid of it immediately. Most credit cards carry annual interest rates of around 30%, an almost impossible rate of return to count on earning with any of your investments.

In terms of your mortgage, it wouldn’t be a bad idea to shop your rate. While interest rates are no longer at their lowest levels, they’re still lower than historical averages. Often the financial institution that holds your current mortgage will allow you to refinance the rate lower, if possible, without incurring closing costs.

Don’t neglect your financial health as we get ready to turn the calendar to 2019.

David Novak, CFP® is a Certified Financial Planner™ at Novak & Powell Financial Services in Pinellas County.
Please note: he is not an attorney and this article
should not be construed as one offering legal advice.
For information about investment decisions and financial planning, contact him at (727) 451-3440.


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