All Things Financial Planning Blog

As we look to the future, there are many lessons we can learn from our past.   The following 10 strategies are lessons that prevail whether economic climates are erratic or calm.  Allow them to serve as the foundation principles for your financial plan. 

1. Maintain an Emergency Fund — Always maintain a reserve account equal to three to six months total expenses in a Federal Deposit Insurance Corporation (FDIC) insured bank account. Never consider investing money if your emergency fund isn’t fully funded. You should always have easily accessible cash on hand.

2. Examine Your Expenses — Take the time to revisit your NEEDS vs. WANTS; sometimes referred to as fixed expenses vs. fun expenses. Your mortgage, utility costs, food, insurance, auto expenses, etc., are fixed expenses. The fun expenses include dining out, vacations, manicures, lawn service, club memberships, lottery tickets, electronic purchases, etc. If money is tight, consider limiting the “fun” stuff for a while. 

3. Safeguard Your Short-term INCOME Needs — If you draw money from investments to supplement your spending needs, consider positioning three years of distributions from your investment account into a highly liquid cash investment such as a money market account. For instance, if you rely on $2,000 per month from your $500,000 investment account — consider liquidating $72,000 ($2,000 * 36 months)  from investment risk and secure this money in a safe, highly liquid investment such as a laddered certificate of deposit, money market funds, short-term bond funds, etc. Your remaining portfolio should continue to participate in a balanced collection of stock and bond based investments.  

4. Rebalance Your Portfolio — Revisit your existing investment accounts at least annually to ensure that the current asset allocation remains in line with your overall risk tolerance and time horizon.

5. Manage Tax Losses vs. Gains — No one knows what tax rates will look like in the years to come, yet there are times when you can control the tax liability on your investments by offsetting realized gains with realized losses. In fact, if you’re like many people, you could have a large tax loss carry forward due to selling investments at a loss over the past couple years.   The recent run-up in the stock market may have created some large gains in your portfolio that could be offset if you sold them and applied the capital gain against the losses you already hold.

6. Avoid Speculation — Never try to recoup losses with quick fix investment strategies. Investment is a long term proposition. Avoid the temptation of get rich quick seminars and razzle-dazzle software programs. Think about it. If speculative trading was so easy, why isn’t everyone already doing it? 

7. Invest in the Stock Market — Rather than trying to time the market, if you have cash available, begin building positions in well-managed, highly regarded mutual funds designed to manage risk while achieving long-term returns immediately. This may be a rare occasion to invest in America at bargain prices.

8. Don’t give up on your 401(k) plan — This employer sponsored pre-tax investment account remains one of the best investment opportunities for working Americans. In fact, contrary to popular belief, you should wish for the stock market to head downward during your “working years” so that you can buy shares of mutual funds at lesser and lesser prices. If you believe that investments will recover over time, never abandon your systematic investment strategy in down markets.

9. Review Beneficiary Designations — Challenging economic conditions offer rare opportunities to reflect and rethink about our life today, as well as the legacy we hope to leave behind. Be sure that you review both your primary and secondary beneficiary designations on retirement accounts, life insurance policies and annuities.

10. Seek Professional Guidance — Now more than ever, consumers are seeking the independent, objective advice of financial planners. Yes, you will pay for advice, but in the end, I suspect that after meeting with someone who is both ethical and independent, you will only wish that you sought help sooner. To find a competent, ethical, financial planner in your community visit FPA PlannerSearch®.

Marc Freedman, CFP®
President/CEO
Freedman Financial
Peabody, MA