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By Michael Schoonmaker - June 25, 2019
With summer here, it's time to make plans for road trips, vacations, the beach, and… your finances?
It may not seem like the most convenient time to check on your financial portfolio, but the start of summer is also midway through the year—a good time to gauge your progress toward your goals and stay aware of potential hazards along the way.
We generally advise our clients to review their portfolios once or twice a year, or when major life events occur. That helps you stay focused on the long term rather than bumps in the road caused by market fluctuations.
Here are five portfolio hazards, and five tips to help you cruise through a summer portfolio review:
A road trip starts with a full tank of gas and a plan for how to get to your destination. When you're investing for your future, you need a solid amount of savings to back up your plan.
Here's why: You'll need enough funds to get you through any unexpected expenses—medical bills, unforeseen house maintenance or major car repairs. If you're not prepared, you might be forced to stop regular investments or even dip into retirement savings.
A good rule of thumb is to set aside enough money to cover three to six months of living expenses. One way to build up an emergency fund is to pay off high-interest debt so you can put more of your money to work for you instead of toward interest payments. Or, cut other costs like restaurant visits or entertainment.
Checking account values on particularly volatile market days could result in emotional responses. Focusing only on recent ups and downs might cause you to buy high and sell low—the opposite of successful investing.
Instead, keep your eye on the destination: A disciplined annual or semiannual perspective takes the emotion out of investing and helps you focused on the future.
Another way to stay on track is to invest automatically, regardless of market swings.
This strategy, called dollar-cost averaging, means you invest whether markets are rising or falling. This also allows you buy more securities when the price is low and fewer when it's high, which could reduce your average cost per share.
And when the investments come out of your bank account or paycheck automatically, it takes the hassle out of remembering to contribute toward your goals.
If you've had any major life events recently, make sure your new circumstances are reflected in your investment plan.
Employment changes, such as a new job, the loss of a job or significant adjustments to your employer's benefits package, can have a big impact on how much you can afford to save for retirement or other investment goals. Additionally, if you determine you'll be retiring earlier or later than expected, you may want to update your contribution amounts and investments to align with your updated time frame.
The same goes for personal events, such as marriage, divorce, death of a loved one or the addition of children and grandchildren. It's important to consider the impact of your family situation on all aspects of your investment plan.
A well-planned portfolio should be divided into a variety of investments, with carefully selected percentages that match your investment goals and time frame. But market changes can skew your chosen percentages.
For example, if you're 15 years away from retirement, you might have 60% of your portfolio in stocks or stock mutual funds, 30% in bonds or bond funds and 10% in cash or money markets. If the market value of your stock portion increases and becomes, say, 80% of your overall portfolio, your portfolio is more exposed stock market risk than you originally intended.
In this case, it may be time to rebalance, or sell your winning stock holdings and get your portfolio allocation back to your original plan.
For example, you may have decided to allocate 60% of your portfolio to stocks, 30% to bonds and 10% to cash investments.
If market activity causes the value of the stock portion of your portfolio to increase significantly, you'll have a greater percentage invested in stocks, leaving you exposed to more risk than you intended.
Rebalancing—buying more bonds and cash investments and selling stocks—gets your portfolio back to your desired 60-30-10 percentage mix.
Source: American Century Investments
If you're not comfortable with rebalancing your portfolio on your own, asset allocation portfolios might be a good option for you. Each portfolio is a well-diversified, professionally managed all-in-one investment solution—a helpful option for long-term financial goals.
A solid plan and a long-term view are important drivers of investment success. If you need help making changes to your portfolio after your review, we offer investment tools and free portfolio consultations to help you get back on track.
Call for a free portfolio consultation or find out how we can help with your overall financial planning needs.
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Dollar cost averaging does not ensure a profit or protect against a loss in declining markets. This investment strategy involves continuous investment in securities, regardless of fluctuating price levels. An investor should consider his or her financial ability to continue purchases in periods of low or fluctuating price levels.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
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