The end of 2016 is upon us, and it is the perfect time to reflect and retool your investments for the coming year. Fortunately for investors, 2016 was a pretty good year by most standards. Unemployment dropped to its lowest point in more than 9 years, and the stock market reached record highs at multiple points this year.
But before you set your sights on 2017, how do you figure out how well your investments did this year — and how to set yourself up for success next year? We’ll guide you in the right direction in this post:
Find out where you stand
To set an effective investing goal for next year, it is important to find out exactly where you are today. Openfolio allows you to compare your investment performance with more than 70,000 investors and benchmarks like the Standard & Poor’s 500 index. You can also create your own benchmark by comparing investors around your age and investing habits. Once you’ve got a handle on where you are, you can start to focus on your objectives for next year.
As a guideline a good investment return in any given year is determined by the overall economy and your age. A gauge of the overall economy would be an index like the S&P 500; though difficult, any return near or above above the index is considered very good. This year the S&P 500 is up more than 10%. Usually a return between 5-8% is considered solid. A return below 4% is conservative if you’re at or in retirement and poor in you’re decades away from retirement. The average investor earned 5% in 2016 according to Openfolio.
If your investment performance falls below these thresholds in one year, don’t be too quick to ring the alarm. It could be that your investments aren’t properly allocated (more on that below) or it was simply a bad year. These thresholds are averages and it is rare that you’ll earn an exact percentage every single year. It is better to evaluate your performance by looking at 3, 5 and 10 year averages and make adjustments based this information.
Ask yourself: What are my goals and objectives for 2017?
Some people are looking to improve their investment performance generally, while others are investing for specific goals like retirement or college. Before deciding how to invest for those goals, you need to determine how much time you have. Your time horizon is the amount of time between today and the goal you want to reach. The amount of time you have to invest will determine what investments are best and what type of accounts are most beneficial for you.
Typically, for short-term goals (1 to 3 years) you’ll want to be more conservative in your investment strategy. This is because you’ll want to play it safe in case the market turns against you. Most goals that fall into this category are usually best suited for certificates of deposit or high-yield savings accounts. For goals that are four years away or more, you can usually afford to take on a bit more risk. This is where you’ll want to find the right mix of stocks and bonds in your portfolio.
One exception, however, is retirement. Unlike investing to pay for a down payment on a home or for college at some time in the future, retirement is not a financial goal that happens at one point in time. Though you may choose a specific retirement date, your money needs to be properly invested to last as long as you do. Your goal for retirement should be to invest “through” retirement not “to” retirement. Your tolerance for risk and the age at which you want to retire will be the biggest factors in determining the right mix of stocks and bonds. To find out what mix works best for you, you can use a risk-tolerance questionnaire.
Where are all of your accounts? When was the last time they were checked? Do you know what you’re investing in? All these are questions you need answered before heading into 2017. It can become very difficult to understand how well your investments have done and what investments you own if they’re scattered in different places. Take inventory of your investment accounts, including any accounts like a 401(k) left at a previous job. Also, be sure to update any beneficiary information on your accounts. You may have had an account at a previous job before you were married or had children, or in some cases you may have a different spouse. Outdated beneficiaries or no beneficiaries listed at all, can be a huge headache for families. If your account is at your previous job, you will need to contact them to make any changes. Alternatively, you can choose to roll over the old account to your new job (if they allow it) or roll it over to an IRA.
Get properly allocated/balanced
Your asset allocation should be aligned with your tolerance for risk, age, and how many years you have until your retirement date. If you do not reallocate at least yearly, you could be taking on more risk than you bargained for. A conservative 50/50 portfolio (stocks/bonds) could become a 70/30 portfolio if it goes unchecked for too long. The latter is considerably more risky, because 70% of the assets are in stocks. Staying properly balanced is much easier said than done. Because when the market does well, as we have seen this year, most investors prefer to ride the wave of growth. Though your portfolio could be growing, it could be growing too much in the wrong investments. When the market pulls back, you will not have enough in bonds and cash to balance the portfolio out.
To make sure you’re properly allocated for 2017 there are a few steps you can take. The first, as I said earlier, is getting organized. It can be extremely difficult to properly evaluate your total asset allocation across different accounts with different types of investments. For example, it would be hard to determine how to rebalance if you had a target-date fund at your previous job, individual stocks in your IRA, and index funds at your current job. The main reason this is difficult is because target-date funds don’t need to be rebalanced, they automatically change as you get closer to your retirement date. But if that fund is a small portion of your overall portfolio, you may need advanced software to determine what the allocation is when you factor in all of your investments. If you need help figuring out your allocation across different accounts, Personal Capital is a great, free tool.
Once you’ve gotten organized, you need to determine what your current allocation is. Most investment companies will show you a summary of your asset allocation, as seen below.
Now that you know what your allocation is, it is time to find out if you need to rebalance. Use your company’s risk-tolerance questionnaire or click here to use one from Personal Capital.
Comparing the two graphs, I would be very close to my ideal allocation and I do not need to rebalance; 82% of my money is in stocks and 18% is in bonds (as seen in the first chart). It is best to do this at least once a year, and if the numbers are too far off, sell some of the stocks, buy more bonds, or vice versa.
There are two instances in which you will not have to rebalance your portfolio: if all of your money is invested in a target-date fund, or it is in an automatically managed account. Both will rebalance periodically according to your goals and time horizon.
Once you’re clear on your goals, stay the course. As we learned in 2016, those who were properly allocated and stayed the course after Brexit and the presidential election profited. Investing is a long-term game, and if you’re doing it right, it should be boring. While many investors check their accounts monthly, and in some cases daily, you’re much better off checking your progress no more than four times per year. Studies have confirmed that investors who check their progress frequently tend to get in their own way.
Additionally, remember that investing is a hurdle, not the high jump. It takes consistent efforts to succeed, not huge dramatic gains. Every year there are about 250 trading days; each will change the value of your investments. Do not make decisions because of one bad day. You will have 249 others to help you recover and grow. And if you’re holding for the long term, you have thousands more.