Let's Get Back to Reality

Here we are, end of the year again.  If you had a properly diversified portfolio, you have done well.  Despite all of the fears and concerns, bonds are up, stocks are up, gold is up, everything is up!

But of course, if you are well-versed in the markets, all boats do not float in the same direction as a rule.  We diversify so that we get a blend of returns, expecting some asset classes to decline while others rise.  In fact, many depend on that $3,000 capital gains loss exclusion to help our taxes along some.  When all asset classes are rising, then you need to really be on guard.  When sentiment changes, you will experience losses in all classes as well. This is not good.  This is why financial planners encourage diversification.

As a fee-only financial planner, I insist on doing an analysis of the client's financial life before I do anything else.  To try to "make as much money as I can" is not compatible with financial planning.  You automatically disregard risk and disregard the probability that you will achieve your long-term financial goals.  Like Vegas, the market will always find a way to take your money.

WHAT SHOULD I BE DOING?

The end of the year is at hand.  At the very least, one needs to REBALANCE the portfolio.   If you have nice gains in one asset class, take something off the table and put it in a class that has underperformed.  Right now, the only class that may be underperforming is Real Estate.

Do the basic things that you need to be doing.  But more importantly, do a financial plan.  Why?

BENEFITS OF A FINANCIAL PLAN

When I do a financial plan, I learn what the client's goals are.  Then, we generate financial projections to see whether or not the client can achieve their financial goals.  Oftentime, they can do it by adding a small sum to their savings and achieving a required rate of return.  Should it be any different?  Why would an individual take on more risk than he or she can survive on?  Run yourself like a corporation. Try to get a required rate of return on your investments.

The financial plan will show you what you need to earn each year to achieve your goals.  Why take extra risk when you don't need to?  You don't need to put all of your money into your retirement or other goal seeking accounts.  You can put excess funds into futures or other high-risk investments if you choose.  But why take a chance with your retirement money?

Financial planning helps you to establish your needs.  Learn what you need to earn to achieve your goals, then develop an investment strategy to earn what you need with the least amount of risk.