10 tips to beat investing inertia in 2013
Let’s get you thinking about improving how you manage your finances in the coming year. My theme this year is fighting inertia. We tend to go with the status quo. Inertia is the enemy of change.
While not all change is good, managing change is always good. I hope the following suggestions will help you fight inertia and regain control of your finances. Here are my tips for doing just that in 2013.
Tip 1: Develop or review your investment policy
Mutual funds do it. Endowment funds do it. Hedge funds do it. Like them, you can have an investment policy statement for how you invest your money. Such a statement lays out your risk tolerance, asset allocations, investment goals, approved investments, rebalancing policy, portfolio performance reporting, liquidity needs and information requirements. I’d encourage even do-it-yourselfers to put an investment policy statement together as a road map to how they will invest. Already have one? Then review it to make sure there are no needed policy changes.
Tip 2: Move the money
Here’s where inertia is a big problem, and action can really help improve your portfolio. If you’re not happy with how your retirement investments are performing, change how the account is invested.
For 401(k) and 403(b) plans at your current employer, you have to work within the investment options offered by the plan. Or, lobby your employer to expand or improve on the investment choices. Individual retirement accounts, Roth IRAs, 403(b) accounts and 401(k) accounts from previous employers are very portable. Find a custodian that has the investment choices you want, with fees and expenses you find to be reasonable.
Tip 3: Know your risk tolerance
Investment professionals measure your tolerance for risk in order to structure an investment portfolio that will help you achieve your life goals while letting you sleep at night, not worried about how you’ve invested. Investors face twin risks: principal risk and purchasing power risk.
There are ways to minimize the risk to principal, such as investing in certificates of deposit backed by the Federal Deposit Insurance Corp. Unfortunately, in today’s interest-rate environment, the after-tax return on that perfectly safe deposit won’t keep pace with inflation, eroding the purchasing power of that investment over time. Do-it-yourselfers can measure their attitude toward risk by using the risk tolerance quiz available at Bankrate.com.
Tip 4: Manage 401(k) fees
Providers of 401(k) plans are now required to disclose the costs or fees associated with investing in these plans. Plan participants already should have received their first disclosure. While there’s been a fair amount of discussion about how difficult it is for participants to wade through the disclosure document and understand the costs, it’s an important step in allowing participants to see if there are ways to better manage the expense.
How you invest within the current plan is one way to manage fees. If the problem can’t be solved by how you invest in the plan as it’s currently structured, you may have to lobby your employer to improve your investment choices and/or to reduce the plan’s fees and expenses. Even if your company’s plan has high fees, that’s not a reason to stop contributing to the plan, at least up to the limit of any company-matching contributions.
Tip 5: Rebalance your portfolio
Over time, your portfolio’s asset allocation mix changes due to the changing value of your investments. As stock prices head higher, the percentage of your portfolio invested in stocks rises. The same is true for any asset class. By rebalancing your portfolio, you bring the asset allocations back to their targeted levels. Don’t have asset allocation targets for your portfolio? This can be the year to pick them.
Rebalancing can be done on a calendar basis, once a quarter or annually. It also can be done whenever the asset allocation moves outside of a targeted range or threshold. For example, if your allocation to cash is zero percent to 10 percent of your portfolio and dividend and interest payments from your investments have pushed that allocation to 15 percent, it’s time to put some cash to work.
Rebalancing your portfolio isn’t done to maximize the return on your portfolio. It’s done to manage the portfolio’s risk. It also encourages you to consider all your investments, not just your retirement accounts. After all, it’s all your money.
Don’t forget the tax man when it comes to rebalancing. While you can rebalance within your tax-advantaged retirement accounts without creating a taxable event, you need to manage the tax impact when selling in your taxable accounts. It often can make sense to rebalance by steering new retirement contributions into underweighted asset categories rather than sell investments in taxable accounts.
Tip 6: Think globally
It’s a great, big world out there, and limiting your investing to just the U.S. markets is limiting your ability to manage risk as well as keeping you from investment opportunities in emerging and developed markets in other countries.
Investing in U.S. multinational firms can work if you’re just not willing to take the plunge, but international mutual funds get you overseas with a minimum of fuss and bother. Just read the prospectus before investing.
Tip 7: Save more money
You can build up the value of your portfolio with a sound approach to investing, but don’t underestimate the power of putting more aside each month, too. Investing to fulfill future life and financial goals improves the odds of you reaching those goals more than you would by making a trip to a department store or restaurant.
In addition, you could beef up your retirement contributions. If you’re not contributing up to the limit of your company’s matching contributions to your 401(k) or 403(b) plan, you’re leaving money on the table.
Tip 8: Spend less of your paycheck
Make this the year you’re not living paycheck to paycheck. Make this the year that you build an emergency fund. Make this the year that you’re not financing current spending by using credit cards and carrying a balance.
Financing today’s consumption at 14 percent or higher on a credit card makes you the grasshopper, not the ant. Get in touch with your ant side and start looking toward the future by building wealth instead of committing your future income to financing your current consumption.
Tip 9: Plan for retirement
With employers moving away from providing employees with a defined-benefits plan in retirement, it’s critical for employees to take control in planning for their retirement.
The first step in taking control is figuring out a goal for retirement savings that will, along with other retirement income sources such as Social Security, provide for your retirement income needs. That said, retirement planning is much more than a number. It includes things such as a strategy for when to take Social Security benefits, planning for long-term care needs, meeting health care needs, paying off a mortgage loan and other debts, and estimating your other income needs.
The Employee Benefit Research Institute’s 2012 Retirement Confidence Survey showed that “workers who have done a retirement needs calculation tend to be considerably more confident about their ability to save the amount needed for retirement than those who have not done a calculation, despite the fact that those doing a calculation tend to name higher retirement savings goals.”
Social Security retirement benefits are only part of the solution to retirement income. The maximum monthly payout for Social Security retirement benefits in 2013 is $2,533 or $30,396 annually. That doesn’t sound too bad until you consider that the average monthly benefit for all retired workers is $1,261 per month or $15,132 annually.
Tip 10: Manage your financial goals
People should use the term “life goals” instead of “financial goals.” Look at what you want to accomplish in your life. Then, look at how managing your income and your wealth can help you accomplish those goals. For example, if providing your children with a college education is one of your life goals, it’s going to compete with other life goals such as meeting your retirement income needs and being debt-free when you retire.
It may mean that Junior needs to start out at a junior college and may even have to pay some of the freight. A little skin in the game could help him focus more on his grades instead of his fantasy football league.
More pragmatic thinking about what your life goal is and how you can accomplish it allows you a higher probability of attaining more of what you want to achieve during your lifetime. Want to live on the water? Does that mean a pond, a river, a lake or the ocean? Don’t buy the oceanfront property if you’re fine with the creek.