Asset Allocation – the Foundation of Your Portfolio

Jane Young, CFP, EA

Jane Young, CFP, EA

Your asset allocation serves as a foundation from which to build your investment portfolio.  An asset allocation identifies the types of investments and the proportion of each you plan to hold in your portfolio.  At a very general level most investments are broken into three categories: stocks, interest earning, and real estate.  Each of these broad categories can be broken down further into hundreds of different options.   The two factors that usually drive an asset allocation are the timeframe in which you will need your money and your personal risk tolerance.  Generally, we strive for a diversified portfolio that provides the highest rate of return for the level of risk we are willing to take.

The first step in developing an asset allocation is to evaluate your current situation and determine when the money you are investing will be used.  Money that is needed in the short term should be placed in interest earning investments, not in real estate or the stock market.  Interest earning investments, such as money market accounts and CDs, are secure but usually provide a rate of return below the rate of inflation.  While it’s important to keep your short term money safe, too much in interest earning investments will stifle the long term growth potential of your portfolio.

Once your short term money has been secured, you can create a diversified portfolio that supports your investment timeframe and risk tolerance.   A great way to diversify is through the use of low cost mutual funds.  Mutual funds enable groups of individuals to pool their money to buy a large number of different companies or government entities.  Mutual funds enable you to maintain a diversified asset allocation by investing in funds with different objectives.  Consider selecting funds that invest in a variety of stocks and bonds in large, medium, and small companies within different industries and different geographical regions.  Your goal is to maintain diversification so that when one category is doing poorly it may be offset by another category that is performing well.   A diversified asset allocation allows you to spread out your risk so you don’t have dramatic losses if a given company or asset class performs poorly.   Additionally, by spreading your asset allocation over a broad range of investments, you may have opportunities that would have been too risky in an undiversified portfolio.

Your asset allocation is the framework of your portfolio – establish a plan that meets your objectives and stick with it!  Avoid making changes to your asset allocation based on emotional reactions to short term changes in the market.   Over time, your portfolio will get out of balance due to fluctuations in the market.   I recommend adjusting your portfolio by rebalancing on an annual basis.  In addition to keeping your asset allocation on target, the need for rebalancing will result in selling stock when it is high and buying when it is low.

Stock Market Investing Requires a Long Term Perspective

 

Jane Young, CFP, EA

Jane Young, CFP, EA

The recent volatility in the market has prompted some investors to question the future direction of the stock market.  Unfortunately, the stock market is impacted by so many factors that it is impossible to predict short term movements.  Over the long term, the stock market has always trended upwards but the path has been anything but smooth.   We could be on the tipping point before a major correction or at the beginning of a long bull market – we just don’t know. 

As a result of this uncertainty, it is impossible to effectively time the market.  Not only do you need to accurately predict when to sell but you also need to know when to re-enter the market.  Even if you select the right time to sell, there is a good chance you will be out of the market when it makes its next big move.  

To compound this issue, decisions to buy and sell are frequently driven by short term emotional reactions.   The fear of losing money can trigger us to make a sudden decision to sell, or the fear of missing an opportunity can cause a knee jerk reaction to buy.  We need to resist these very normal emotional reactions and maintain a long term focus.  The stock market should only be used for long term investing.  If you don’t need your money for at least five to ten years you are more likely to stay invested and ride out fluctuations in the market. 

If you lose your long term perspective, and react to short term emotional reactions, you can get caught up in a very detrimental cycle of buying high and selling low.  An example of a common cycle of market emotions begins when the market drops and you start getting nervous.   Over time you become increasingly fearful of losing money and end up selling your stock investments after the market has dropped considerably.   Then you sit on the sidelines for a while, waiting for the market to stabilize.  The market starts to rebound and you decide to jump back in after that market has gone back up.  Afraid of missing a great opportunity, you buy at the market peak.   This is a self-perpetuating cycle that can be very harmful to your long term investment returns.

To avoid the temptation to time the market and react to emotional triggers, keep a long term perspective.   Focus on what you can control.  Maintain a well-diversified portfolio that is in line with your long term goals and your investment risk tolerance.  Live within your means and maintain an emergency fund of at least four months of expenses.  Invest money that you will need in the short term into safer interest earning investments.   By limiting your stock market investments to long term money, you will be more likely to stay the course and meet your investment goals.

What to Do When You Lose Your Job

Jane Young, CFP, EA

Jane Young, CFP, EA

Breathe – Losing a job seems like a huge catastrophe when it happens, but it could free you up to pursue new opportunities.  Most jobs are lost due to a reduction in workforce, over which you have no control.   Try to move through this transition with grace.  It’s not personal;  try to avoid becoming sad, angry or bitter.    This process is difficult for everyone involved, and the person letting you go may be in a position to hire you in the future.

Carefully Review Your Severance Package – Make sure you fully understand and agree with the terms of your severance package.  Don’t hesitate to consult an attorney if you are unclear or disagree with the terms of your separation agreement

File for Unemployment – If you were laid off due to no fault of your own, you may be eligible for unemployment benefits.   Unemployment may not be available while you are covered by a severance package.

Review Your Budget – Review your expenses and cut-back on unnecessary expenses.  Develop a new spending plan that will help you cover expenses until you find a new job.   Hopefully, the combination of your emergency fund, severance pay and unemployment will cover your necessities until you find a new job.  To make ends meet, you may need to consider short term assignments or part time work.

Arrange for Health Insurance – Review options available through Cobra as well as insurance on your own.  If you are married, look at health insurance options through your spouse’s employer.

What’s Next?    You have just received the gift of freedom, to make a career change.  Do you want to continue in your current career or do you want to pursue something new?   How much training, education, time and money will it take to pursue your dream career?

 Update Your Resume and Start Job Hunting  – Update your resume and start looking for a new job.  Take advantage of services that may be offered by the outplacement firm hired by your previous employer.  If you decide to return to school, you may need to pursue a part time job while you re-tool.

Build and Nurture Your Network – Most jobs are found through word of mouth.  It’s essential to do a lot of networking.  Let all of your contacts know that you are job hunting and what you are looking for.  Actively maintain accounts on Facebook, Linked In and Twitter to help you with your job search.  It’s also advisable to have personal business cards made so potential employers can reach you more easily.

Use Your Time Wisely – Treat looking for a job as a job.   After a week or so, you should keep your days structured.  Spend your time working toward getting a new job, getting your life organized and taking care of your health.  This is a very stressful time, be sure to eat well and get plenty of exercise.