The big mid-year financial checkup
The best way to combat today’s uncertainty is to sit down and take stock of your financial health, says this U.S advisory. And do it now.
The world doesn’t want us to get too comfortable.
It starts with the financial turmoil that has persisted for three years.
It continues with a series of disturbing events coming one after another, in the Gulf of Mexico, in Korea, in Gaza. Not to mention the intractable war in Afghanistan.
But what can most of us really do about it except wince and hope that those in positions of power will get a grip on things?
We can make sure we’ve got our own houses in order, says one
American observer.
Whether news is good or bad for the rest of the year, says Mr. Andrew Leckey, “you can’t deal with it intelligently unless you fully understand your current condition. In some cases, corrective action should be prescribed.”
Mr. Leckey writes the “Wall Street Report” in The Bull & Bear Financial Report. But this column is about Main Street, not Wall Street.
We all know the value of investment plans. But the sad fact is, many investors never really put one together, or if they do, let it lapse due to time constraints or just plain old procrastination.
But this is just the time to take stock of your finances, writes Mr. Lecky. He asks several experts what they think investors should be doing.
The black and the red
“Everyone is breathing a sigh of relief that the world did not end,” says Ms. Marilyn Capelli Dimitroff, a financial planner in Bloomfield, Michigan. “But you really need to look at finances in relation to your own needs, goals and long-term financial health.”
You begin with the black and the red. Write down all your income for the first six months of the year. Then put down all your expenses, with the help of your checkbook and credit card statements.
If you’re in the black with positive cash flow, terrific. If you’re in the red, you will at least know exactly how much you need to cut expenses to get back in the black.
Having done this, you also have before you the means to project your income, expenses and savings for the second half of the year. If your budget for the first half was unrealistic, you can make adjustments.
Since your income isn’t likely to change much in the months ahead, the key, as always, is spending. Studying credit card statements isn’t always fun, but it’s a useful exercise. “Diagnosing your spending habits helps prescribe a workable budget that includes regular savings and investment,” says Mr. Leckey.
Long-term logic
But what about your investments? “The first thing you need to do at mid-year is ask yourself whether you need to re-balance your portfolio,” says Mr. Ray Ferrara, an investment manager in Clearwater, Florida.
This presupposes an asset allocation model with a set percentage of stocks, mutual funds and fixed-income investments.
Let’s say your stocks have appreciated over the past year to take up 70 per cent of the value of your portfolio, instead of the 55 to 60 per cent you’ve allotted. Are you wedded to those gains, or are you willing to take some profits to restore your original asset allocation?
Not that you necessarily have to sell — if you’ve been adding to the cash portion of the portfolio you might use some of that to buy bonds to rebalance the portfolio. The point is, do you stick to your plan?
“The most difficult part of an investment plan is staying disciplined with your allocation even though temporary events may draw your long-term logic into question,” says Mr. Ferrara.
Be very careful with the bond portion of your portfolio, adds Ms. Evelyn Zohlen, a financial adviser in Huntingdon Beach, California. As interest rates rise (and they will, with Canada already out of the gate), existing bonds with lower rates will decline in value.
Shorten your bond maturities to less than five years, she tells clients (we hear the same advice from Canadian advisers we consult). But stay away from Treasury Inflation Protection Securities — that’s Real Return Bonds in Canada — while interest rates and inflation remain low.
But the key to it all is debt.
Not a tough decision
Debt got us into this mess in the first place. It was debt packaged into derivatives that set off the credit crisis. And we’ve heard more than enough about sovereign debt, with Greece as Exhibit A.
Paying down debt is clearly essential to your financial health. But pay the highest rated debt first, counsels Mr. Ferrara. If a client has $6,000 in credit card debt and $10,000 in the bank, he or she needs to examine things closely.
“When you consider you’ll either pay $840 in interest on the credit card or earn $30 in interest on money at the bank, deciding what to do is not a tough decision.”
Once you have your finances in order (including insurance, pension plans, a will and an estate plan), there’s one more step for these uncertain times. “Build an emergency fund of three to six months of living expenses in a liquid money-market or short-term bond fund,” writes Mr. Leckey.
As for the next six months, one of these advisers is anxious on one point. “The most worrisome thing to me would be interest rates being held artificially low for too long because it will mean that money will be just too easy to get,” cautions Ms. Zohlen. “Companies love this because they get cheap money to fund capital projects, but the stock market reacts by going up very quickly and then painfully correcting.”
That’s just one more reason to sit down and give yourself a thorough financial check-up.
Getting back to the basics may seem to be a banal suggestion. But the fact is that too many people on Wall Street and Bay Street and Main Street strayed very far from the basics in the past decade.
And we’re still trying to balance the books.
|
E-mail this article
Printer-Friendly
