100 Tips for 2011 » Top 10 investing tips for 2011
With an economy still on the mend and unemployment stubbornly high, it’s important to make the best investing decisions for you and your family. The best strategy blends managing risk while investing to get the most bang for your buck.
Take these baby steps and follow the rest of Bankrate.com’s 100 tips for 2011 and you can improve your financial life in the coming year.
What do you want out of life?
The trend in financial planning is to work with people to help them determine what they want out of life, and then establish financial objectives that will facilitate the client’s ability to achieve those life goals. Money becomes the catalyst instead of the goal.
Don’t get drawn into the vague generalities of a comfortable retirement, an education for your children or travel abroad. When you know what you’re working toward, you’ll be more committed to investing for those goals. The Bankrate feature, “Use investments to reach your goals,” can help you get started.
Financial planning is a lot more than just managing your investments. A comprehensive financial plan looks at the big picture. It includes a review of your insurance, employee benefits, income taxes, investments, retirement and estate planning, as well as personal financial statements, your attitudes toward risk, and your goals.
A good planner is the captain of your financial ship. The Certified Financial Planner Board of Standards Inc. has a wealth of consumer-friendly information, including the publication “How to choose a financial planner.” The Bankrate feature, “Financial planners: not just for millionaires anymore,” gives additional insight.
Whether you do it yourself or work with a financial planner, you should have an investment policy statement that serves as a guide on how you want to invest.
This guide should include the investor’s philosophy toward investing, investment objectives, the investor’s attitude toward risk, a target asset allocation, guidelines for monitoring portfolio performance and an approach to portfolio rebalancing.
Other items should cover tax considerations, estate planning goals, fees and expenses, and trading costs. It should spell out an approved list of investments, and whether the investor allows trading on margin, short selling and investing in derivative securities. And it should also spell out whether the investor’s account allows discretionary trading by the account manager.
Know how you feel about risk in investing.
The “Investment Risk Tolerance Quiz” offered by Rutgers University’s New Jersey Agricultural Experiment Station, can give you a quick read on your risk tolerance. If you find yourself tossing and turning at night and it’s not your mattress but rather the markets keeping you awake, then it’s time to dial down the risk in your portfolio.
Knowing your risk tolerance will help you decide how to invest your money. Conservative investors may not be comfortable with investing much money in the stock market because of its volatility. Lower volatility means lower potential returns, so a conservative investor will have to save a higher percentage of his income to be on track to meet his financial goals.
Investors have to manage their investments considering twin risks: the risk that their investments lose principal and the risk that their investments lose purchasing power. Conservative investors can protect principal by investing in certificates of deposit insured by the Federal Deposit Insurance Corp., but the FDIC doesn’t protect the purchasing power of those deposits. Keep an eye on your purchasing power, too.
Calendar rebalancing is one approach to adjusting how you’ve invested. Others include target rebalancing and tactical rebalancing. Calendar rebalancing has you adjust your portfolio on a regular basis. Target rebalancing waits until an asset allocation is above (or below) the maximum (or minimum) target asset allocation. Tactical asset allocation has you reducing or increasing the allocation to an asset class based on your outlook for that asset class.
An active management portfolio strategy that rebalances the percentage of assets held in various categories in order to take advantage of market pricing anomalies or strong market sectors.
Investment allocations in financial securities are typically split between stocks, bonds and cash. The investment allocation that’s right for you will depend on your risk tolerance, investment goals and market outlook. You may decide that an allocation of 50 percent stocks, 30 percent bonds and 20 percent cash is right for you. If this year’s stock performance brought your stock allocation up to 60 percent, then rebalancing the portfolio will get you back to your target allocation.
Tax and other considerations like estate planning can influence your desire and ability to rebalance your portfolio.
Establishing an emergency fund is where most consumers should start investing.
Starting out, it’s best for the money to be invested in liquid and safe investments like a money market account or a money market mutual fund.
Financial planners typically suggest the fund hold three to six months’ worth in living expenses. The more risk you face in the workplace, the more you should have available. The Bankrate feature, “Creating an emergency fund,” will help.
Counting on cash advances from your credit cards or loans from your 401(k) plan are not viable financial backstops because the credit card companies can raise the interest rates to obscene percentages and a plan loan won’t help you if your financial emergency is getting laid off from your job since a 401(k) loan comes due when you leave an employer.
Your “approved list” is the stocks and bonds you’re willing to invest in and the cash you plan to hold. Even within those basic categories you can invest in individual securities, mutual funds or exchange-traded funds, or ETFs.
If your portfolio doesn’t have an international component, looking beyond domestic investments can make sense, and not just for stocks.
Expanding the list to include commodities, precious metals and real estate can give your portfolio diversification. Learning how to hedge portfolio risk with options and futures contracts is best left to a discussion between you and your investment professional.
The Internal Revenue Service removed the income limitations for Roth IRA conversions, starting in the 2010 tax year. Unfortunately, there are still income limitations on who can contribute to a Roth IRA. That forces taxpayers with incomes above the contribution limits who want to hold retirement assets in a Roth IRA to perform the intermediate step of contributing to a traditional IRA and then making a converting contribution to a Roth IRA.
If investment returns don’t pan out, taxpayers have the ability to recharacterize their Roth IRA contribution as a contribution to a traditional IRA. The taxpayer has this option up until Oct. 15 of the tax year following the conversion year. Converting in January 2011 gives you the flexibility to recharacterize over 21 months. Investors should have a better read on the recovery and tax code changes over that time span.
Work with your tax professional to determine if converting your traditional IRAs to Roth IRAs makes sense.
You need a sense of how big your investment portfolio should be at retirement. The Employee Benefit Research Institute’s 2010 Retirement Confidence Survey concluded that only 46 percent of workers or their spouses have attempted to estimate their retirement nest egg needs.
If you construct a household spending plan (or budget), you can use the total annual expenses as a guide to what you might need in retirement.
Financial planner recommendations typically range from 75 percent to 100 percent of your annual expenses while working, but exclude money budgeted for retirement savings. You’ll be taking distributions from these accounts, not funding them.
Bankrate’s retirement calculators can help you right-size your nest egg by estimating your income needs in retirement, considering how much you have already put aside and deciding on your pre-retirement savings goals.
If your company’s 401(k) or 403(b) plan has your employer matching contributions, then you should contribute up to the limits of the company match. A typical 401(k) matching program has the employer contributing 50 cents for every dollar you contribute up to a limit of 3 percent of salary. You contribute 6 percent, the company contributes 3 percent, and you just made a 50 percent return on your money.