At my annual physical exam recently, the doctor took my vital signs, reviewed my medical records, and after reading my EKG results, said, “Well the computer says you’re having a heart attack.” But the computer was wrong.
I’m in my early 40s and run marathons, and my heart rate is extremely low. So, after reading the EKG, the doctor went to work. She asked me several questions, reviewed prior data and my medical history. After doing her research, she overruled the machine.
The same situation can apply to people looking to establish a financial plan or review their current plan. Without the right data and appropriate questions, even a financial plan using sophisticated software to create a financial model can give an answer that isn’t reality.
January is when many people review their portfolios and update their financial goals for the year. Because of the stock market’s performance in 2021, investors who own stocks have seen their net worth rise; some people are worth more today than ever before. This can make their financial plan appear very strong or cause some to think they don’t need to revise their plan for the coming year.
But has the next bear market been factored into the plan? What about personal or family changes, such as a job relocation on the horizon, potential tax rate increases or the prospect of buying that second home? All of these life changes can have a major impact on one’s financial strategy — questions that a computer model isn’t likely to ask.
When it comes to financial planning, the data inputs are critically important, as well as answers to these questions. A financial adviser should be asking a wide variety of questions to make the model work.
As you review your plan in January, here are some key questions and recommendations to consider.
Is Your Portfolio Still Invested Correctly to Match Your Goals?
When you develop your financial plan, one goal is almost always to become financially independent and retire comfortably. With the market’s growth in recent years, many people may reach that goal sooner than expected. However, the three strong positive years of stock market growth we’ve seen recently won’t continue forever.
Investors should not assume last year’s portfolio returns will be the norm going forward. Instead, they should rebalance their portfolio to build in the appropriate level of stocks and bonds to match their retirement time horizon. A portfolio that is overly aggressive can have a sharp downturn in the next bear market, and retirement security can be thrown off course. Determine if your portfolio is invested correctly for your retirement …….