As the year draws to a close, it’s a good time to review your progress toward your financial goals. But on what areas should you focus your attention?
Of course, you may immediately think about whether your investments have done well. When evaluating the performance of their investments for a given year, many people mistakenly think their portfolios should have done just as well as a common market index, such as the Standard & Poor’s 500. But the S&P 500 is essentially a measure of large-company, domestic stocks, and your portfolio probably doesn’t look like that — nor should it, because it’s important to own an investment mix that aligns with your goals, risk tolerance and return objectives.
It’s this return objective that you should evaluate over time.
Your return objective will likely evolve. If you are starting out in your career, you may need your portfolio to be oriented primarily toward growth, which means it may need to be more heavily weighted toward stocks. But if you are retiring in a few years, you may need a more balanced allocation between stocks and bonds, which can address your needs for growth and income.
So, assuming you have a long-term investment strategy with a target rate of return for each year, you can review your progress accordingly. If you matched or exceeded that rate this past year, you’re on track, but if your return fell short of your desired target, you may need to make some changes. Before doing so, though, you need to understand why your return was lower than anticipated.
For example, if you owned some stocks that underperformed because of unusual circumstances — and even events such as hurricanes can affect stock prices for some companies — you may not need to be concerned, especially if the fundamentals of the stocks remain sound. On the other hand, if you own some investments that have underperformed for several years, you may need to consider selling them and exploring new investment opportunities. Other factors also should be considered consider when looking at your financial picture over the past year.
What changed in your life? Did you have a new child? If so, you may need to increase your life insurance coverage or open a college savings account. Did you or your spouse change jobs? You may now have access to a new employer-sponsored retirement account, such as a 401(k), so you’ll need to decide how much money to put into investments within this plan. You almost certainly moved one year closer to retirement, so you may need to re-evaluate how much risk you’re willing to tolerate in your investment portfolio. Whether it is the performance of your portfolio or changes in your life, you always have reasons to look back at your investment and financial strategies for the year — and to look ahead at moves you can make for the next.
Michael J. Eakman II is a financial adviser at Edward Jones.