Contributed by: Melissa Joy, CFP®
When markets go down, investors ask themselves what should be done. Urgent questions may seem less relevant as investments climb. If you're like many investors, you appreciate the good feelings and tend to move on. But are there things you should be doing when your portfolio grows?
- Plan for upcoming cash needs. If you're using your investment portfolio to supplement income or meet specific financial goals, planning ahead can pay off. Anticipating cash needs and raising funds needed for short-term expenses helps reduce frustration and stress if markets go down and encourage investment discipline for longer term funds.
- Rebalance portfolios. Have you ever wondered if you can master the art of buying low and selling high? The process of rebalancing your portfolio may be just what you're looking for. With rebalancing, you trim your investments that have grown more and add to investments that have a smaller allocation due to slower growth or declining prices. This can help to smooth the investment ride over time and may reduce risk as measured by standard deviation. Additionally, it's a great way to provide discipline for buying or selling with cash going out or being deposited.
- Make your charitable contributions. For many investors, a gift of appreciated stock may offer double tax benefits - a deduction as well as a lower potential tax bill. The advantages of this strategy are maximized when the investment is higher. You may be in the habit of making gifts around year-end but consider reviewing your options during the year to capitalize on appreciation and avoid last-minute to-do lists.
- Reflect on your investment perspectives. Did you know that investors tend to feel much more pain from investment losses than pleasure from similar positive investment returns? It's difficult to appreciate this in the heat of the moment. Keeping notes on your feelings and investor emotions through a journal or through a discussion with your advisor about your feelings as your funds drift higher can be helpful. These feelings are equally as important as stress when accounts are down. Understanding your personal investment highs and lows work in tandem.
- Don't ditch the plan. Investment returns are inherently variable and rarely come in even increments. Markets tend to go up more than they go down. Don't bail on your discipline, go on spending sprees, or abandon your process.
If you haven't put a pen to paper with a personal financial plan, there's no time like an up market to review your circumstances and plan for the future. Consider working with a financial planner to get your growing financial house in order.
Melissa Joy, CFP® is Partner and Director of Investments at Center for Financial Planning, Inc. In 2013, Melissa was honored by Financial Advisor magazine in the Research All Star List for the third consecutive year. In addition to her contributions to Money Centered blogs, she writes investment updates at The Center and is regularly quoted in national media publications including The Chicago Tribune, Investment News, and Morningstar Advisor.
Financial Advisor magazine's inaugural Research All Star List is based on job function of the person evaluated, fund selections and evaluation process used, study of rejected fund examples, and evaluation of challenges faced in the job and actions taken to overcome those challenges. Evaluations are independently conducted by Financial Advisor Magazine.
The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Melissa Joy and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.