Your personal finances are a lot like the game of football. Here’s how to score a few touchdowns.
Do you protect your quarterback?
It is essential to protect the earnings of workers in your household with proper life and disability insurance. Sadly, most Americans are under-insured, and don’t realize that fact until it’s too late. A basic rule of thumb is to obtain life insurance in the amount of at least seven to ten times the income of any earners in your family.
In addition, disability insurance is extremely important, as over one out of four of today’s 20-year-olds will become disabled before they retire. Ideally, you want to cover two thirds of your pretax income. Note that group disability insurance paid by your employer will be taxed, whereas any disability insurance for which you pay after-tax premiums will be tax-free.
How strong is your defensive line?
Your best defense for protection against unexpected casualties is to have a solid risk management plan. In addition to life and disability insurance, you need proper property and casualty insurance to protect your home and car.
Check your limits on coverage to ensure you can replace your home at today’s building costs. Make sure you have adequate limits for your “under-” and “un-” insured coverage, so that you are compensated if you have an accident with someone who has insufficient insurance.
Most people forget to purchase umbrella liability coverage. This insurance is inexpensive, but protects you if someone sues you due to an accident at your home or on the road.
Of course, don’t forget proper health insurance, and be able to cover any out-of-pocket costs with a solid emergency cash reserve.
Is your offensive strategy all “Hail Mary” or do you focus on “ball control?”
Many investors like to play a specific stock or sector in order to make a big tactical bet on short term performance. Similar to a “Hail Mary” pass, this concentrated position can increase your risk of failure.
Instead, invest in an “all- weather,” low-cost, diversified portfolio that exposes you to various asset classes like US equities (large, mid and small caps), international equities (both developed and emerging markets), real estate, natural resources, high quality bonds and cash. Try not to let your company stock or individual stock or sector position exceed 10% of your total portfolio.
Are you disciplined or penalty prone?
Investors can be their own worst opponent. Two major offenses are procrastinating saving for retirement and trying to time the market.
Americans are poor savers. We don’t want to delay gratification and figure we can make up for our current low savings rate sometime in the future. If you delay your retirement savings to your 40s or 50s, you will have to save considerably more to make up for lost time and the value of dollar compounding. Early savers let time do the work for them.
Research shows that investors tend to pile into stocks when they’re reaching their all-time highs, and sell when prices are dropping precipitously. Buying and selling at inopportune times can shave several percentage points off of long term rates of return.
Emergency reserves and or funds that will be needed within 3-5 years should be segregated from your investment portfolio, to provide assurance that you can stay invested for a full market cycle (4-5yrs) and avoid the risk of forced liquidation (at possibly depressed prices).
Are you willing to accept busted plays and occasional losses in order to maintain you long term edge?
Just like in the game of football, our investment portfolio can experience occasional fumbles, false starts, and losses, but over the long haul we are rewarded with better returns if we can be loyal fans of our investment plan.
There is really no such thing as totally riskless investment. With risk comes potential reward. A patient disciplined investor is rewarded over the long run for taking on risk. Just like we stick with our team through thick and thin, we need to do the same for our investments.
Develop an asset allocation of stocks, bonds and cash that is consistent with your risk profile and that you can stick with over the long haul or until your goals and objectives change. If you sit in cash and wait until you think it is safe to reenter the market, you will be losing purchasing power to inflation and risk possibly outliving your funds.
How good is your pregame preparation?
Sadly, the average American probably spends more time tailgating and watching sports, than time spent managing his or her finances each year. Commit to spending some time each month on your financial matters.
Review your insurance. Increase your awareness of spending. Establish an asset allocation based on your goals and tolerance for risk. Invest in a fund or stock only after doing thorough research on the investment. A good place to start is www.morningstar.com. Look for funds that are consistent performers, that are “no load,” and that have low expense ratios.
The best way to establish a game plan would be to work with a coach. Seek out a fee only CERTIFIED FINANCIAL PLANNERTM professional. He or she can help you develop a holistic financial plan and investment policy statement consistent with your life goals and objectives.
Laura Scharr-Bykowsky CFP® is a fee-only financial planner located in Columbia, SC who helps people of all ages prepare for retirement and make wise financial decisions. For more info visit www.ascendfinancialplanning.com
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