2019 is the Year to Focus on Your Financial Plan (and not the Stock Market)
By Isabela Sanchez
This past December was one for the books — and not in a good way. On Christmas Eve, the S&P 500 index fell by 2.71 percent, the biggest plunge ever on the last trading day before Christmas. Did Santa Claus skip town?
Now, talks of volatility in the stock market, federal interest rate hikes, U.S.-China trade negotiations and the U.S. government partial shutdown mark every headline. With all this noise, how is it possible to stay calm and carry on?
If you are a longterm investor, the solution is exactly that. Market swings, or “corrections,” are normal. If you don’t need to utilize your investment funds for an immediate goal, then experts agree that you should still invest in stocks and avoid trying to “time” the market. Instead of poring over headlines, you should focus on your longterm financial plan. Here’s a few planning tips to help:
(1) Determine your financial goals and the purpose behind your investment portfolio: This is the time to really focus on what you want. Do you plan to retire early? Do you dream of a second home or paying off your student debt? Make a list of your financial goals and prioritize them.
(2) Make sure your portfolio allocation is appropriate for your desired goals: If you are setting aside funds to purchase a home in the next two to three years, then you should be more conservative. However, if these funds are for your retirement and you have 40+ years before then, it’s appropriate to take on more risk.
(3) Review your risk tolerance and investment policy statement: Accepting some risk is how you earn returns, but are you taking on too much? A typical 70 percent stock to 30 percent bond portfolio ratio would have taken a roughly 24 percent hit during the financial crisis in 2008. If that kind of drawdown makes your stomach churn, then maybe it’s time to dial back your equity exposure.
(4) Start reducing your debt: As tempting as it is to funnel your money into the stock market, debt repayment should be a priority. The cost of carrying debt can far outweigh your investment returns, especially in a bear market. List your debts and create a plan to tackle them, paying off your higher-interest-rate debt first.
(5) Look at your 2018 spending: Call your credit card company and obtain a yearly statement or download one. Look at your spending as a percentage of income. Are you spending too much on superfluous items? The general rule is to save 10 to 20 percent of your income to grow your net worth and reach your financial goals. Another tip is to have three to six months’ worth of immediate expenses saved in a liquid “emergency fund” for unforeseen financial binds. Curtailing spending gets you closer to having that emergency fund.
A new year is a great time to get a 30,000-foot view on your long-term financial plan. If you focus on this rather than the short-term volatility in the market, then you will be in the driver’s seat with regards to your life goals.
Isabela Sanchez, CFP, is a trust officer and assistant vice president at Coral Gables Trust Company