Safe Landing Financial Investing Guide

1. Build Your Financial Plan

How are your investments going to help accomplish your personal and financial goals? What are your investments tracking to? Why do your investments need to take on a certain level of risk? Is your career just beginning or approaching retirement? Are there upcoming major events to consider, such as paying for a new home or college? These are all questions that should be answered when building a financial plan.

A financial plan serves as the GPS paving the way to get people from where they are today to where they want to be. By starting with a financial plan, investors identify how they will save money needed to invest and the risk profile that their portfolio needs to take to reach their financial goals. A financial plan that should be updated at least once a year or anytime there is a major life event.

2. Implement Your Financial Plan

Now that there is a financial plan in place, how does one start investing? The financial plan should serve as an investor’s compass and point in the right direction to invest to reach their financial goals.

Investors can implement their financial plan by making the necessary changes in their budget to save for their financial goals. How much should people save? As a general guideline, most financial planners recommend saving 10-20% of after-tax income or as much as one comfortably can.

After the savings strategy is designed, they should be distributed into the investing vehicle that they are targeted for based on the financial goals. If savings are designated for retirement, then they should grow in a tax-deferred or tax-free vehicle such as a 401(k) or Roth IRA. If savings are set aside for paying for the kids’ college, then they should be in a vehicle such as a 529 plan. If savings are earmarked for the trip to Europe in six months, then they should be in a vehicle such as a bank or taxable account.

3. Invest Your Portfolio to Align with Your Financial Plan

Building a Diversified Portfolio

What are your investment objectives? What is your time horizon? What is your risk tolerance? These questions should be identified in a financial plan. It’s important to establish the purpose before moving forward.

Once the purpose for the investments is determined, the investor should focus on building a simple and repeatable process. For that reason, exchange-traded funds (ETFs) and mutual funds are desirable in designing an efficient portfolio. If an investor prefers individual stocks and bonds, it is recommended to have the time, interest, discipline and energy to build a diversified portfolio.

It’s impossible to predict which asset classes and sectors will outperform on which day, month or year. Instead, investors are more likely to achieve their financial goals by diversifying their portfolio to best align with the financial plan.

How to Limit Fees

While analysts do not always know which way the market will go, investors can always be sure what they cost. One of the best ways to get better performance is to be aware of and limit unnecessary costs. ETFs and passively traded mutual funds may have expense ratios between 0.03% and 1% depending on what area of the market they cover. Actively traded mutual funds tend to range between 1-2% depending on the mutual fund family and manager of the fund. Passive management may be more efficient in an area like large-cap US equity whereas active management may be more efficient in emerging markets. Be aware of the differences in investment management style and how they impact expense ratios. Don’t settle for investments with higher fees if there are lower cost options that may fit better. Cost isn’t everything, but it is something!

Tax-Efficient Investing

Taxes play a major role when considering which investments are appropriate for investor’s portfolio. When investing in a taxable account, investors must pay the difference in net capital gains to Uncle Sam. There are several factors that should be taken into consideration for building and maintaining a portfolio. Ideally, people want to pay less in taxes and defer taxes as long as possible. Here are some strategies to consider for tax-efficient investing:

Tax-Loss Harvesting

This is the practice of selling a security to recognize a loss. With the abundance of ETFs and mutual funds that cover the same areas of the market, it’s important to take advantage of this rule. After all gains have been offset, up to $3,000 of any remaining capital losses may be deducted against ordinary income. Capital losses carry forward indefinitely for future years until they are used fully against income tax or offset by future gains.

Recognize long-term gains and short-term losses.

Short-term capital gains are gains recognized while being held for under one year and are taxed at ordinary income tax rates. Long-term capital gains are gains recognized while being held for over one year and are taxed at 15% for most people. Short-term losses must cancel out any short-term loss before being used to cancel out a long-term gain.

Place securities in the most tax-efficient accounts.

Here are some examples of placing securities in the right account:

• Municipal bonds should always be placed in a taxable account where interest is generally exempt.
• Aggressive equities may fit better in a tax-deferred or tax-free account where capital gains are not owed when recognized.
• Stocks that pay qualified dividends are more ideal for a taxable account.

4. Rebalance Your Portfolio to Align with Your Financial Plan

The primary reason for rebalancing is to stay disciplined as an investor limiting risk. There is no proven method of outperforming the markets. When ignored, asset allocation fluctuates over time. In a market upswing, an equity allocation will outperform fixed income. If the market corrects or experiences a downswing, the equity allocation will experience more volatility than fixed income. Rebalancing on a consistent basis allows investors to track better to their financial plan over time and limit downside risk.

How often should investors rebalance? Studies show that there is no perfect science between a triggering event or period of time stating to best follow a rebalancing strategy. It’s more important to develop a repeatable process and stay consistent over time.

Rebalancing is important to limiting the downside risk of a portfolio and tracking to the financial plan. The only way rebalancing is effective is by updating the financial plan at least once a year or any time there is a major life event.

Need help designing an investment and rebalancing strategy based on your unique financial plan? Let’s chat!

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