2017 is here! – time to set some goals. But before we can just launch right into setting goals, first we really should make sure our financial house is in order. The new year represents a great time to do a little financial housekeeping and make sure your investments are where you want them to be, or prepared to go where you want them to go.
Here are 3 things you should look at the beginning of each year.
Asset Allocation – What percentage of your money do you keep and where do you keep it? In my opinion, the most important component of asset allocation is stocks v. bonds. There is no right answer here and even the “rules of thumb” usually depend on your age, time to retirement and other factors. Within your allocation of stocks and bonds, there are other things to consider like the amount of domestic v. international stocks or more nuanced investments like emerging markets, commodities, REITS, etc. The bottom line is when it comes to an asset allocation plan, you need one and you need to have a reason for it – that’s what makes it right for you. There really is no right answer, but its important to do your research and formulate a plan that is right for your specific circumstances. The best resource I have found on asset allocation is Rick Ferri’s, “All About Asset Allocation” which provides a great overview and options for individuals.
Once you have a good plan then you should reevaluate it every year. You may not change it, but you want to make sure the reasons your initially picked that plan are still the reasons you are keeping your asset allocation plan.
2. Re-balancing – Once you have your asset allocation plan you will periodically need to re-balance your portfolio to make sure you are still aligned to your original plan. Even if you asset allocation doesn’t change- the performance of your investments, movements in the various parts of the markets and even contributing factors like rising interest rates, will cause your portfolio to get out of balance. All this means is, lets say you have have 90/10 plan where 90% of your investments are in stocks and 10% are in bonds, because of the market performance this past year, you might have 92% in stocks and 8% in bonds. Re-balancing would simply move 2% of your portfolio into bonds so you are back in alignment. All online brokerages can easily handle this type of transaction and its really pretty straightforward.
A 90/10 split between stocks and bonds is the asset allocation I use for my portfolio because I like the diversification. Dividend growth investing is just one type of approach I use to grow passive income, but many dividend growth investors have an asset allocation plan that is 100% in dividend paying stocks. If this is the case then re-balancing is pretty straightforward (hint: you don’t re-balance) since its all in only one type of investment!
3. Net Worth – Its important to know your net worth and to track your progress as you grow your nest egg over time. In its simplest form, you want to know what your total assets are and what your total liabilities are. Once you have these than you simply subtract the liabilities from your assets to get your net worth. In my opinion net worth is the single most important metric to track and the ultimate measure of your investing success. No matter what happens with individual investments, if your net worth is growing, you are probably still in good shape.
A lot of folks track their net worth monthly which works for them and like with asset allocation, there it no right interval to track net worth. For me, monthly is a bit much and not necessary especially since a lot of your net worth will be driven by assets like your house and liabilities like your mortgage. Your home simply doesn’t appreciate that much in 30 days and at the same time, that one additional mortgage payment isn’t going to reduce your balance very much. But if you like seeing the incremental progress I think its fantastic and you should do it. For me once a year is fine and the gain is hopefully meaningful enough that its material and really cool to see!
To track my net worth I use a modified version of an investment tracking spreadsheet from Doughroller.net. Its a Google spreadsheet and its free. This is easy to do because you will already have a lot of your assets listed in the document so if you just pull in liabilities, then you essentially have your net worth right there. If this is too much for you then Bankrate also has a pretty easy to use net worth calculator which is also free, but doesn’t give you the same flexibility.
There are a lot of other items you could tweak or check at the beginning of the new year, but I think these 3 are critically important and make sense to do before you sit down and do any more detailed planning or analysis. Happy New Year and here’s to a great 2017!
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Disclaimer: I am not a investment or financial professional of any kind. Any information contained within this site is for informational purposes only and should not be considered advice or a recommendation of any kind. All information is simply an opinion and should be treated as such.