How to Perform a Financial Tune-Up April 19, 2017

Managing your finances is a bit like keeping a car operating in tip-top shape – a tune-up is recommended every now and then to ensure everything is running smoothly. The tips listed below can help you analyze your finances with an eye to making any necessary improvements to your financial strategy.

Understand Your Risk Tolerance

When markets are performing well, there is a tendency to avoid taking the time to seriously evaluate how comfortable you are with the risk level of your portfolio. However, markets go down as well as up, so taking time to determine what amount of risk you are willing to take is something that should be done before a bear market strikes. To ascertain your risk tolerance, you can talk to your financial advisor or use one of the many applications designed for this purpose which can be found online.

Increase Your Knowledge Base

Whether you work with a financial advisor or are handling things yourself, when it comes to investing it pays to expand your knowledge base as much as possible. This holds true for experienced as well as novice investors. One way to do this is to learn as much as possible about the characteristics of various types of investments. This way, even if you hire an expert to help select investments, you will have a better understanding of the investments your advisor selects. For instance, understanding the difference between mutual funds, which are diverse baskets of investments that are typically priced at the end of each trading day, and electronically traded funds (ETFs), which can be bought during the trading day like a stock and are usually pooled investments that mirror an investment index.

Another important distinction to make when it comes to investments is the difference between actively managed and passively managed mutual funds or ETFs (it should be noted that most ETFs are passively managed). Actively managed funds try to pick securities which enable the funds to outperform an index such as the S&P 500, while passively managed funds simply try to mirror, as closely as possible, the performance of such indexes.

Examine Your Investment Objectives

It’s not enough to simply align your investments with your risk tolerance; you should also examine your investment objectives to make sure that your portfolio is allocated appropriately. Generally speaking, if you are saving for long-term goals such as retirement or a child’s college education, growth is likely to be necessary to achieve the desired amount of funding. On the other hand, shorter-term goals such as funding your lifestyle in retirement or augmenting your income before retirement are more likely to require income-oriented than growth-oriented investments. Identification of the type of investments most likely to help you reach your objectives, in combination with consideration of your personal risk tolerance, enables you to build a portfolio designed to meet your investment goals in a manner that is aligned with your personal circumstances.

Don’t Count on Rates Staying Low Forever

The long period of low interest rates experienced in recent years is anomalous when viewed from a historical perspective. As a result, it makes sense to examine your finances to see how they are likely to react to rising interest rates. For example, if you have an adjustable home mortgage you may have already seen your rates rise as the LIBOR rate used to determine many such rates has risen recently in response to the Federal Reserve boosting its discount rate. Another asset likely to be affected by rising rates is bonds. Individual bonds and bond mutual funds and ETFs, especially long-dated bonds, decline in value when rates rise, meaning that unless you are planning to hold such investments until maturity, you should be prepared for a potential decline in their current market value if rates rise from here.

Cash Isn’t Trash

While investing for the long term is generally best served by investing in at least some growth-oriented investments, keeping some money in a cash reserve at all times, even if you don’t plan to use it anytime soon, is recommended by many financial experts. The amount to keep in an emergency reserve is up to you, but one rule of thumb says that setting aside 6 months in salary is a good general guideline to use. Having such a reserve ensures that, along with being prepared in the event of an emergency, if you should need funds in a hurry during a market decline, you won’t have to sell assets at bargain basement prices.

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Samuel Rad is an award winning fee-based Financial Planner with Affluencer Financial Advisors in Los Angeles, California. Mr. Rad has multiple licenses in the investments, real estate and insurance fields. He has spent a considerable amount of his career lecturing at universities and companies, on financial topics such as financial planningretirement planning, and estate planning.

He currently lectures at UCLA and West Los Angeles College.