Building your Financial
Success
With Alain Aube
Financial Investments
How to read your
financial scorecard
You get statements — maybe plenty of them — from your bank, mutual fund
investments, registered plans, stock purchases or sales and anywhere
else you've invested your money, with the expectation that it will one
day grow into a comfortable nest egg to fund your retirement or other
life dreams. As each statement arrives in the mail, you look at it in
hope, excitement, satisfaction or dismay — and then consign it to your
files perhaps never again to see the light of day (unless you need it
for tax purposes).
But, don't be too fast to file — those statements contain important
information that you can use to assess the current health and future
prospects of your overall financial life. Here's how:
Add up your score. The ultimate performance of all your investments is
much more important than the outcome of any game. But, when you look at
your financial life from a game-like viewpoint, you can get a good
handle on where you are now and any changes you might need to make to be
a winner down the line. A good way to do this is to collect your
statements (at least every three months - a convenient timeframe because
registered plans and mutual funds often provide quarterly statements)
and rate your interim 'score' — the current return on your investments —
against the ultimate scorecard, your overall financial plan. This
periodic review will tell you whether you're staying on track toward
your goals.
Stay on track by keeping your eye down the road. Periodically assessing
the performance of your investments is good — but don't fall into the
trap of minutely dissecting each individual investment and its return.
If your portfolio is properly designed, it will be diversified across
the three basic asset classes — cash investments, fixed-income vehicles
and equities — and among assets within each class. This is done to
reduce the overall level of risk for your portfolio for a given rate of
return, and if your portfolio is truly diversified, some asset classes
will always outperform others, depending on the prevailing market
conditions.
Drive your portfolio by looking forward - not in the rear view mirror.
Don't put your financial plan into reverse by abandoning an ideal asset
allocation to chase asset classes that outperformed others in the
previous quarter. Market studies are clear: panic buying and selling
based on short-term market fluctuations never pays off. Sure, many
equity markets were down for an extended period, but history has shown
that after a declining phase, the risk of further decline is less and
the potential for a rebound much higher. Even for the experts, though,
it's impossible to 'time' the market. So staying invested is the key to
enjoying the full financial benefits of market resurgence, regardless of
when it occurs. That's why there's always plenty of room for equity
investments in every portfolio.
Seeking less volatility by loading up on guaranteed investments could
also cause damage to your financial future. This type of conservative
investment usually offers a low rate of return — and the eroding effects
of inflation can virtually eliminate any longer-term benefits. On the
other hand, you should consider adding more fixed-rate investments to
your portfolio if this asset class is under-represented in your ideal
asset allocation.
Yes, minor portfolio tweaks will always be necessary as your financial
situation and goals change — and the periodic statements you receive can
provide an important 'reality check' on the health, direction and
ultimate success of your overall financial plan. A professional
financial planner can help make sure your portfolio stays in balance and
on track to achieve your life dreams.
