Author: Darrell R. Tierney CFP® CPA PFS

In this crazy market, how do you know if your investments are on track?

If you are a mutual fund or hedge fund manager you might compare your performance to a stock index such as the S&P 500, or perhaps to similar funds. If you are evaluating your personal financial progress, we think there is a better way. We suggest you track your progress against your personal plan.  We believe all portfolios need a plan. You might need several plans.

So how do you start to plan? The first step is deciding what the money is for. Is your money for retirement, a house down payment or a vacation home?  We suggest giving every dollar in your accounts a name.

A “checking account” is for monthly bills. Instead of “savings,” name the account for its specific purpose such as emergency fund, new car fund, vacation fund, remodel fund, retirement fund, etc.  You get the idea.

The next question is when do you need the money? Your answer will drive your investment selection. Money for a trip to Hawaii next year should be invested very differently than funds for retirement in twenty years.

On a side note, people nearing retirement, sometimes become too conservative with their investments since they don’t have much “market recovery time” left. Certainly funds needed for the next few years should be in conservative (low risk) investments.

But after retirement, a married couple may have another thirty-five years on the planet.  Here rising prices are the enemy, and conservative investments may not keep up.

When you know your money’s purpose, and when it’s needed, you can turn your attention to asset allocation. At the 50,000 foot level, this is deciding your stock, bond and cash mix. When this is identified, drill down deeper and select asset classes (for example large companies, small companies, international companies,  real estate, municipal bonds, U.S. Treasuries, etc.).

Knowing your asset classes leads to picking investments.  You must decide whether to buy stocks, bonds, mutual funds, or exchange-traded funds (ETF’s).

Do you favor investments that follow an index or those with a manager? Finally, consider the various accounts for your goal- IRA’s, Roth’s, 401(k)’s or personal taxable accounts.  Take the asset allocation decision seriously because it probably will determine your future portfolio performance and volatility.

Carefully consider your risk tolerance, time frame, income taxes, savings and withdrawals, and how the asset classes “work together.”  Once your asset allocation is selected, you can estimate expected future portfolio returns.

Now it’s time to determine how the money flows. How much can you commit to your goal today? How much can you save monthly? Will your savings increase over time? When are the funds needed?

Will you withdraw it in a lump sum or over many years? Have you considered inflation? If prices go up a modest 2.5% per year, things will be 25% more expensive in ten years. You better plan on that.

Now you have all the pieces. With a calculator or spreadsheet, you can use your expected portfolio return, and planned cash flows to guesstimate year by year how much money you will have. You’ll know quickly if your plan is workable.

Doesn’t look feasible? It’s time to recalibrate by adjusting the money committed, your monthly savings, your asset allocation, or your planned withdrawal amount or timing. Once the numbers work out your plan is complete-but your planning is just getting started!

Every year compare your account balances to your plan. Don’t “set it and forget it.” Life happens. Your plans will change and your results will certainly be better or worse than planned. Your results might be VERY different. That’s when you reevaluate your plan, recalibrate, and make adjustments. Repeat the process every year for the rest of your life.

Does all this seem daunting? If you’re not handy with a calculator or aren’t knowledgeable about investing, call us. This is what Windward advisors do every day. Tell us your dream; we’ll help with the plan.

Now that’s how to evaluate performance!

This blog is provided by Windward Private Wealth Management Inc. (“Windward” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in the individual blog posts will be derived from sources that Windward believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

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