February marks an exciting time of year. The holidays have passed and the Super Bowl is upon us. The teams still playing tend to be the best prepared, most adept at executing a game plan, and are able to make strategic adjustments should the environment dictate the need to do so. The same attributes are important when we analyze our financial goals for 2017 and beyond.
A key factor in reaching a desired outcome begins with having a well thought out plan. Understanding what your goals are drive that process. Asking questions is a good place to start:
- What are your current and long-term cash flow needs?
- What is your risk tolerance?
- Do you have wealth transfer or estate planning needs?
- How much money do you need to retire?
There are several other questions required to create a strategic game plan, to identify an appropriate risk level, and to establish your asset allocation. Identifying your personal risk level is a critical step in analyzing your current financial status and balancing it against your long-term goals and objectives.
Once a plan is outlined and an appropriate risk level is determined, a critical part of the implementation of the plan is setting your asset allocation. Asset allocation is the strategy of distributing risk between asset classes such as stocks, bonds, and cash. Building a diversified portfolio invested in different asset classes can help protect your portfolio as losses in one asset class could be offset by gains in others. Portfolio Diversification refers to the spreading of risk by placing assets in a variety of investment classes and in a broad range of investments within each class. Diversification can play an important role in long-term investment success by dampening volatility. Setting and maintaining your strategic asset allocation and periodically rebalancing when appropriate will help smooth out the inevitable periods of volatility. Periods of increased market volatility can often times result in investors making short-term investment decisions that are detrimental to their long-term performance.
Like the quarterback who sees an unexpected defense and calls an “audible”, or a change to the original play, there may be times when you need to review and adjust your strategy. A change in financial status or an unexpected life event may necessitate modifications to your strategic plan. Conducting periodic portfolio rebalancing is also very important because it helps maintain your stated target asset allocation and risk profile.
Ultimately, the Super Bowl LI champion will have executed a series of successful game plans. Effectively developing, implementing, and monitoring your financial game plan can give you a better chance to achieve your long-term goals. If this process seems overwhelming, contact a financial advisor to assist you.