By Michael Egan, CFP®
CERTIFIED FINANCIAL PLANNER™
Partner, Egan, Berger & Weiner, LLC
Watching one of the best Super Bowl games ever (go, Patriots!), I was reminded of the importance of sticking to the basics even when the outcome is uncertain. So I thought this would be an appropriate time to remind everyone of the fundamentals of financial planning.
It can be very easy to get distracted by all the noise in the media as well as from your friends and colleagues. But the reality is that last year was a great year for large-cap US stocks (the S&P 500). The index was up 13.7 percent. Many individuals are wondering why their portfolios did not come close to getting that rate of return.
They ask: Should we make changes and be more aggressive? Should we get rid of bonds or international stocks?
Before doing anything, keep in mind these 3 Financial Rules of Thumb:
- Rule #1: Stay diversified and do not chase returns. Historically that has worked very well. You may never get the best returns, but typically you will get what you need to meet your goals, usually with significantly lower volatility.
- Rule #2: Stay within your risk tolerance. Chasing returns usually upsets or dramatically alters the portfolio volatility potential. Most people do not even notice volatility when the market is going up, but what about when it’s going down? The S&P 500 lost 49 percent between March 2000 and October 2002. It also lost 56 percent from October 2007 to March 2009. And let’s not forget about the 22 percent drop in one day in 1987. Would you be comfortable with that drop and be patient enough to let the portfolio recover without selling?
- Rule #3: Now is the time to be self-disciplined, stick to your plan, and re-balance. Based on 2014 growth, most people are now overweight in large-cap US stocks and real estate. Take the overweight positions and redistribute into the areas where you are probably underweight (for example, international and emerging markets stock). Sell things as they are going up and buy things as they are going down.
The Patriots did not win this year’s Super Bowl by getting away from the basics, and neither should you.
Remember that the Super Bowl most of us want to win is having a successful financial plan. In most cases, your financial plan has improved significantly over the last five years. Let’s not get distracted from this fact and take our eye off the ball.
During the next 12 months, take the time to meet with your financial adviser to review your overall risk tolerance and to make sure that your portfolio is aligned with your financial plan.
Source: Dates and percentages courtesy of nbcnews.com.
About Michael Egan
- Founding partner of Egan, Berger & Weiner, LLC
- 24 years of experience in the financial services industry — as a mutual fund analyst, accountant, and financial planner
- Graduate of George Washington University, with a degree in finance
- Hosted a weekly radio show on financial planning in the Washington market.
- Presenter on retirement planning for Fairfax County Public School’s Adult and Community Education
- Active member of the Financial Planning Association (FPA)
- The son of Irish immigrants, Egan has been married to his wife, Terri, for 20 years, and they have two daughters, Amanda and Shannen. Originally a native of Connecticut, Egan moved to Northern Virginia in 1990. He is an avid New England sports fan and roots passionately for the Red Sox, Patriots, Celtics, and UCONN Huskies.
Learn more at www.EBWllc.com.
