Re-examining your portfolio and your financial goals annually is always a good idea. With a tentative recovery underway, asking the right questions is critically important.
The recession may be over, but the recovery, like the market turbulence that preceded it, continues to surprise investors — and to present opportunities. When you discuss your portfolio with your Financial Advisor, these five questions can help you assess how to move forward.
1. Am I taking too much risk — or not enough?
Recent market volatility has caused many people to lower their appetite for risk and reduce their exposure to riskier assets. Last year their concerns may have been warranted. But now, as the economy strengthens, investors may want to consider whether their conservative stance is really still in line with their feelings about future and current market trends, says Ash Rajan, Director, Investment Management & Guidance for Merrill Lynch Global Wealth Management. Given the improving markets, it may be time to re-evaluate your risk tolerance and asset allocations to avoid missing out on emerging growth opportunities. In times of market volatility, it's particularly important to review your portfolio with your Financial Advisor at least twice a year. Ideally, Rajan says, you'll do this once at the beginning of the year and once midyear or when there is unusual market turbulence, whichever comes first. This will not only allow you to sleep at night but also help to ensure that your investment portfolio and asset allocation match your objectives.
2. What can I do to get my retirement savings back on track after the downturn?
Asking the question is the first step. "Whether you are transitioning into retirement or already there, you need to discuss exactly how your retirement plan has been affected by today's extraordinary conditions and to consider how to close any gaps between your projected income and expenses," says Chuck Toth, Director of Product Management, Personal Retirement Solutions. Set up the time now and on a regular basis to have an in-depth talk with your Financial Advisor about where you stand.
Planning for retirement is an important balance of saving, investing and spending over the course of your life. Depending on where you are in your retirement journey, Toth says there are a number of strategies to consider to stay or get back on track. These can range from specific accumulation strategies to a broad rethinking of how best to build and distribute your assets through the remainder of your retirement years. In the former category, people not yet in retirement may decide to increase their rate of 401(k) or IRA "catch-up" contributions or recalibrate their portfolios. For instance, they might consider harvesting profitable investments or those that seem unlikely to recover soon and using the proceeds to diversify into new holdings, such as high-quality, dividend-paying companies or stocks that now have strong growth characteristics. For others closer to retirement or already retired, the emphasis shifts to such issues as evaluating spending, managing taxes, and generally striking the right balance between meeting short-term income needs through income- or dividend-paying investments and pursuing growth to ensure there is sufficient funding over the long haul. Merrill Lynch has a new program called the Retirement Framework that you and your Financial Advisor can use to balance all these considerations and devise the right set of strategies for you.
3. Is my portfolio truly diversified — or should I consider other sectors and asset classes?
Asset allocation has long been the hallmark of prudent investing. And that was borne out in the latest downturn, when widely diversified portfolios tended to have relatively lesser downsides than those that held concentrated positions in only a few asset classes or sectors. Review your allocation with your Financial Advisor to help make sure you're protected in the event of another sudden, high-risk market event. "We know, for example, that some investments held up relatively well last year," says Rajan, pointing to cash, Treasuries and managed futures. "So clients should be asking: Did I have enough exposure to these and other asset classes? Is my portfolio diversified enough now?"
4. How can I shift my portfolio to be prepared for unexpected cash flow needs?
Don't be caught with your assets tied up in the event of a sudden crisis. "If most investments in your portfolio are illiquid — hedge funds, private equity and the like — and you need the money this year for a major expense or emergency, you may have to sell those investments at the worst possible times," says Rajan. Better to consider your liquidity needs ahead of time and make sure you're leaving additional room for unanticipated events, such as a family member's illness or job loss — or a child's wedding or a business opportunity.
5. Is the timing right to begin planning my philanthropic legacy?
Establishing a family legacy may sound daunting, but it can actually begin quite simply: by exploring which charitable organizations you feel most strongly about and discussing your goals with your Financial Advisor. There are numerous ways to make your portfolio reflect the values you cherish, be they energy conservation, education or the eradication of poverty. Relatively basic donor-advised funds, charitable remainder trusts or more ambitious family foundations can all make a difference. You may also want to work with a tax professional as you devise your philanthropic strategy. "Bank of America Merrill Lynch has a dedicated center for philanthropy advice and guidance," says Rajan. "Your Financial Advisor can act as concierge to help you explore charitable options and get advice on philanthropic issues."