If you’re like most people, looking back over the past few years can leave a bitter taste in your mouth in regards to personal finances. One good thing about making mistakes…you get to learn from them! Moving forward, we all have an opportunity to make changes in how we manage our money and investments to avoid some of the mistakes of the past. Reviewing your past investing strategies can help you pinpoint areas that could use a bit of tweaking. Here we look at how you can adjust your investment strategy to better serve your needs.
Take Stock
Whether you’re rich or poor, everyone has been affected by the recession. What worked in the past? What didn’t? Was your emergency fund too small to survive a lay-off? Or was it large enough at first, but you ended up squandering your savings on non-emergencies? Did you panic and sell your investments at the bottom? Honest answers to these questions will help you decide what, if anything, you need to adjust going forward.
Consider The Risk
If you’ve spent years building a nest egg only to see it cut in half, you might be considering one of the following paths: an aggressive approach to quickly rebuild your savings or a more cautious approach to limit future loss. I urge you to avoid giving into either impulse. What’s done is done, and you can’t get your money back. Going for broke is obviously extremely risky, but so is investing so conservatively that you’d have no chance of reaching your goals. It is important to reevaluate your risk tolerance in light of recent losses to determine if you were perhaps a little aggressive in your asset allocation. If you panicked, you should adding more cash and bonds to your portfolio. If, on the other hand, you brushed off your losses and had no trouble sleeping at night, you might even consider increasing your equity exposure.
Review Your Asset Allocation
Once you have determined your risk tolerance you should take a second look at your asset allocation. Risk tolerance is only part of the equation, after all: your need to take risk is at least as important as your ability to take risk in determining how to divvy up your investment dollars. After much consideration, I decided to make a few changes to my Roth IRA allocation. These tweaks were more about rounding out my asset allocation with a few minor asset classes than recalibrating its risk profile, however.
Stay The Course
When stocks are plummeting, it’s tempting to jump on the band wagon and follow what everyone else is doing: namely, sell. Likewise, when the market is going gangbusters (like it has been recently, especially REITs), it’s tempting to jump at what’s working right now. It is imperative you do your own homework and that you adjust your investment strategy to reflect your own personal needs and comfort level. What works for your neighbor, boss or physician may not be what is right for your situation. Nobody cares as much about your finances as you do. Only you can decide what asset allocation is right for you.
You should review your investment strategy on a regular basis regardless of the state of the economy because your needs and goals will change over the years.