By creating a disciplined approach through an Investment Policy Statement, you can navigate the ups and downs of investing with confidence and reduce the impact of emotional decision-making. It's all about having a clear plan, sticking to your strategy, and periodically reviewing your progress to ensure you're on the right track.
Reflect on what you hope to achieve with this money. Is it financial independence? Peace of mind so you can sleep at night? Continued growth for heirs with some portion? Income to cover your expenses after pension/Social Security? If there are values you want to incorporate into your portfolio holdings, think about how to best do that.
Depending on your tax bracket, explore tax-managed, tax-exempt, or tax-deferred investment vehicles. Strategically consider whereto hold different types of assets for tax advantages.
Brokerage costs have significantly decreased, so pay attention to expense ratios of mutual funds or ETFs. If you invest in individual bonds or CDs, ensure the costs are reasonable.
This is driven by your asset allocation (how much you hold in cash, bonds and stocks). In retirement, you may want to take less risk because you can afford to without jeopardizing your future needs and it fits better with your own risk tolerance. Or you may want to continue to hold more in stocks and balance risk in some other way. It’s a very personal decision.
Set your target asset allocation for your portfolio and estimate what you think your return will be on that mix. I generally allow +/-10% on the asset categories before I rebalance. If you don’t know where to start, websites like Vanguard.com have good educational materials about asset allocation and how that mix affects risk and reward.
If you subscribe to the Put Your Money Where Your Heart Is approach, as I do, think about how you want to put your money into action to support what you care about. If it’s making gifts to certain people, have you considered how much you can afford to give? If it’s charitable organizations, you may want to work through a Strategic Giving Checklist that details how and who you will give to this year.
Like most things in life, you need to carve out some regularly scheduled time to make sure your investments are performing as you expect and you are managing the cash flows that you’ll need. If you find anything unexpected, think about what steps you will take to get back on track.
So consider how often you’ll review your bank and brokerage accounts, how often you plan to rebalance your portfolio if it drifts outside the parameters of the Investment Policy, when to review your tax return and think about tax efficiency (taxable vs tax-exempt holdings), monitor and adjust cash flows, quantify interest generated and note rates of return actually achieved.
I like to look at my portfolio as a whole (liquid and retirement assets). But there may be other assets that should have their own target allocation like Donor Advised Funds or 529 College Savings Plan. Look at how these are allocated in your Annual Review process and rebalance if necessary. It’s easy to forget about these assets.
It’s possible that you may have differentInvestment Policies for differing objectives within your portfolio. If so, think about what the appropriate risk level is for those objectives and find a target asset allocation that will best help you achieve your plans for that money. For example, if you want to purchase something major in the short-term, be more conservative with that money.
Investing can feel like a wild roller coaster ride, with ups and downs that can make even the steadiest of hands shake. That's why having a plan in place, created in advance, is so important. Chasing after hot stocks can lead to getting burned, so it's crucial to bring discipline into your money management equation and remove fear and emotion from the picture.
