Are There Monsters Lurking in Your Financial Plan?
Financial planning doesn’t have to be scary. With the right guidance, you can design a plan that puts your money to work for you both now and in the future. But every once in a while, a monster sneaks into your finances to do something truly diabolical: place obstacles between you and your long-term financial goals.
Luckily, most financial monsters are easy to defeat with a little planning. Let’s take a look at four that are worth hunting down.
Zombies: The Things That Live Too Long
Whether you’re getting married or divorced, having more children or sending your youngest off to college, changing jobs or being promoted, big life events can change your financial picture. When you don’t update your financial plan accordingly, you can end up with zombies. They weren’t always monsters. That old 401(k) from a former employer used to be a perfectly fine financial instrument. The insurance policy you bought when you had minor children once had a useful, noble purpose. But now they’re the things that won’t die—financial tools that no longer match your life. And they can make it harder to get the most out of your money.
What to do:
The thing about zombies is that they’re only really scary in hordes. They’re not so tough when you take them on a few at a time. The best course of action is to review your plan whenever your circumstances change rather than wait until you have decades’ worth of zombies pounding at your door. After a major life event, review old accounts, beneficiaries, insurance plans, allocations and other parts of your plan. It’s also worth taking inventory periodically, even when it doesn’t feel like much has changed. Look at the assets you own and consider why you own them. Are they still a vital part of your plan, or are they the living dead?
Vampires: The Fees That Slowly Drain You
When it comes to your long-term investment returns, there are only a few things you can control. Fees are a big one. Like vampires, they can’t enter uninvited. That’s a good thing because unnecessarily high fees drain your money a little at a time. Over the years, these costs can really add up. And because they represent money that could have been invested, the drag on returns compounds over time.
The most dangerous vampires are the ones that can repeatedly attack without you even noticing. For instance, consider a mutual fund’s expense ratio: You won’t get a bill for that fee because it’s deducted directly from your account balance.
What to do:
Financial vampires have an additional weakness. Not only do they need your invitation to enter your portfolio, but they also have to leave when you tell them to. Review the costs associated with your investments. Understand what each expense pays for and consider which ones are worth the cost. You don’t need to drive a stake through every fee, but you should know which ones earn their keep and which ones are quietly sucking the life out of your portfolio.
The Werewolf: The Panicking Investor
Most financial monsters are hiding in your investments. But sometimes, in a terrifying twist, the monster is the investor themselves. Most days, they’re rational and mild-mannered, implementing a long-term plan carefully constructed to support their goals. But every so often, they transform into something dangerous.
For financial werewolves, sudden market shifts are like a full moon that makes them abandon their long-term plans. Markets drop, and they start panic selling. Markets surge, and they act like there’s no such thing as risk.
It’s perfectly normal to feel fear or enthusiasm when the market is changing quickly, but a good financial plan already accounts for the fact that the market can behave unpredictably. So there’s no need to let those intense emotions make decisions for you.
What to do:
The cure is to trust your long-term financial plan to weather temporary ups and downs. Your plan was built around your unique life circumstances and how best to reach your long-term goals. That includes accounting for the inevitable swings in the financial markets.
Frankenstein’s Monster: The Mismatched Portfolio
Each investment in your portfolio might look like a standout on its own. But taken as a whole, do they work well together? Like Frankenstein’s monster, a portfolio full of mismatched investments may not accurately reflect your goals, time horizon or risk tolerance. For instance, a new mutual fund may overlap too much with one you’re already invested in, or your company stock holdings might mean your overall portfolio is riskier than you thought.
What to do:
Don’t just look at your investments one account at a time. Consider your portfolio as a whole to confirm that it matches your investment strategy. Understand how a new investment alters your overall exposure and whether you need to compensate elsewhere to bring your plan back into balance.
Think of the portfolio you’ve created as a dynamic, living organism. You’ve got to check in on your creation regularly to make sure everything’s working as it should. And we’re here to help you do that. So if you think your plan might be plagued by these or any other monsters, please reach out, and we’ll hunt them together.
