The Importance of Reassessing Your Financial Plan
Most people do not spend their entire working life in the same job or with the same company without at least reassessing their position at some point in time. To think of it another way, you would not keep the same one-bedroom apartment you had as newlyweds when you start having children. Just as you reassess your career and your housing situation, you should also be assessing your financial plan over time. There are many valid, important reasons for reassessing your financial plan.
While it seems ideal to just set your money aside and let it grow, you need to rebalance your accounts at least once a year. All 401k accounts are designed with a certain ratio of stocks, bonds, and cash in mind. US News & World Report notes that a portfolio with 70% stocks and 30% bonds can shift on its own throughout the year, for example, on the strength of a good equity market. The result may be an allocation that is now 75% stocks and 25% bonds. Your portfolio is straying towards a strong performer, but when it strays from its target balance it can actually lose you money in the long run.
Leaving 401k accounts to sit untouched still generates savings, but if you are not making moves to buy and sell funds, you are missing out on the opportunity for better returns. A quarterly rebalance of your portfolio can add as much as another half-percent return each year. It is also important to look at your allocation, which refers to the money you have in different classes of retirement funds. Bankrate points out that reallocation may be necessary to ensure that you retain balance.
Reassess Your Risk
Any type of investment comes with risk. Your financial advisor can help you determine your own investing nature: a more aggressive approach opens you up to bigger risks with bigger rewards, or a more conservative route allows for a lower risk with favorable rewards. Generally speaking, the more time you have to save, the bigger the risks you can afford to take because you have time to recover any losses in the longer run as the market rebounds.
As you age, your risk tolerance will change. For example, you can afford to be aggressive when you take your first job out of college because you have 40 years of work ahead of you to save, invest, and gain. As you get closer to retirement though, low risk investments that better protect your nest egg are crucial. You will get smaller gains, but they will still be reliable and come with less risk for loss.
Whether you are just starting out, at the midpoint of your career, or entering retirement, reassessing your financial plan allows you to step back and be realistic. Each step in your life should feature investments of money you can afford to lose, not amounts that would put you in dire straights financially. The more money you are comfortable losing, the higher your tolerance, as long as it fits your life.
Ask your financial advisor for help in determining which types of allocation come with risks you can tolerate. For example, government bonds and money market accounts are great low risk options, while real estate, high-income bonds, and equity mutual funds bring a more moderate risk. Contact Indian River Financial for more information.