At Investing Daily, we have grown increasingly concerned with the national trend toward underfunded retirement plans. As a service to our readers, for the next few weeks we'll send you a complimentary series of focused briefs to get you thinking about new ways to maximize performance both inside and outside of a structured 401k or similar plan.
This is the third installment in a five-part series.
"Ask People's Advice, but Decide For Yourself." – Old Ukrainian Proverb
I heard the refrain all the time in my trading days on Wall Street.
The client, a little nervous and apprehensive, would say, "I don't trust my instincts with my portfolio – you guys do everything for me."
My job was to trade, but I had enough contact with clients to know they really didn't trust their instincts, and were only too happy to turn 100 percent control of their financial fortunes to fund managers, stockbrokers, and investment bankers.
Yes, you want to go with a professional, but it's never a good idea to relinquish 100 percent control of your investment portfolio, and that goes double for your 401k plan.
The sad fact is, some people just don't want to take control over their investment portfolio.
That's a big mistake.
Nobody is impacted by investment decisions as much as the person whose name is on the portfolio. And nobody is going to step in for you and make good on a lousy asset allocation strategy or a misguided risk assessment that leads to massive portfolio losses.
No, taking control of your investment portfolio is all on you – as it should be.
Fortunately, getting a grip on your 401k investments is easier than you think. In fact, you can get the job done in these 10 easy steps:
Step #1: Know your net worth
In a global economy where information is as much a commodity as widgets or weed whackers, it pays to know what you�! �re worth.
That's where knowing your net worth comes in handy.
Your net worth, also known as a personal balance sheet, gives you a blueprint for your financial life, one that you can work from again and again as you make lifetime financial decisions. It's a fluid document that you'll need to revisit every six months or (at the outer limits) every year, but you'll be glad you have it.
Quantifying your financial goals is critical in the investment process and your personal balance forms the yardstick by which you can measure the success of your financial plan. As time marches on, you can tweak the strategy for your financial plan along the way to achieve your defined goals.
Step #2: Know your objectives
Any good marksman will tell you the key to hitting a target is having a target. Having something to aim at, to work towards, gives you the framework for a successful personal portfolio plan.
Step #3: Know your risk factor
Risk assessment is easy, although investment advisors try their hardest to make it complicated. Always know going in what you can afford to lose and, going forward, manage your portfolio correspondingly.
Knowing your risk tolerance will help you decide which investment strategy is right for you. For example, if you have a low risk tolerance, you may want to invest in a more conservative portfolio even though your time horizon indicates you could be more aggressive. Evaluating your timeframe can be critical, particularly when building a portfolio based upon a projected retirement date.
Step #4: Diversify your assets
The best way to have avoided being caught up in market volatility is to have your money spread around among different investments.
When your investments are diversified, or spread across different asset classes or types of securities, they work together to help reduce risk. So go ahead and enjoy the benefits of slow and steady blue chip stocks along with potentially higher-flying growth stocks.! Mix in s! ome US Treasury Notes with those international bonds. Spread the wealth and secure portfolio performance in the process.
Step #5: Allocate your assets
In Wall Street terms, asset allocation is more like investment diversification on steroids.
One Wall Street trader compares asset allocation to earning two quarters and then putting the coins not only in different pockets, but in different pants. That's as good a definition as any.
In more formal terms, asset allocation means investing across a variety of asset classes, with the objective of determining the optimal mix of assets for your portfolio to properly withstand – and adjust to – changing market conditions. Usually that means branching out among the four main asset classes – stocks, bonds, cash and metals. The difference between diversification and asset allocation is that the former is the "macro" big picture theme and the latter is the "micro" nuts-and-bolts theme to building your mutual fund.
So yes, you should diversify your portfolio. But how you do that is what's known as asset allocation.
Step #6: Find a "comfort zone" with a financial advisor
Having a professional shoulder to lean on once in a while can be a source of comfort to an independent-minded investor, especially one without significant portfolio management experience. Hire a good advisor but continue to do your own homework and pick your own stocks. Run those picks by your advisor to see if they pass the smell test.
Always feel free to drop me a line here at the 401k Millionaire – I'm happy to take a look at your portfolio and offer any help and guidance on getting you where you need to be, investment-wise.
Step #7: Properly research investments
This one's a no-brainer – you've got to do your homework.
Read prospectuses, check company financial statements, watch CNBC, and check out the 401k Millionaire on a regular basis. In short, do anything you can to bone up on the fin! ancial ma! rkets and the companies that trade on them.
Also, take advantage of on-demand investment tutorial web casts and webinars and use any real-time information offered by your investment firm. Join and participate in online trading communities and swap investment strategies with like-minded investors. In the investment world, understand that knowledge really is power.
Step #8: Be the boss
Never give a financial advisor the right to buy or sell without your prior approval. That way you won't have any surprises and you'll have control over what enters and leaves your personal portfolio. Remember that you're the one who has to live with the decisions made on your personal portfolio – it's your investment "brand" and nobody else's.
Step #9: Check your ego/emotions at the door
One of the biggest errors average investors make is investing with their emotions.
When stocks rise, they buy; when they fall, they sell. That's exactly the opposite of what a successful investor should do. If you can't trust your emotions then by all means run your portfolio selections by a professional advisor – or even trusted family member, friend, or spouse.
Step #10: Lastly, have fun
You're your own boss now and the 401k investment brand you create will have your personal stamp on it. So enjoy all the benefits and all the power that genuine financial independence provides.
As you do so, consider how far you've come in taking control of your financial life. After all, nobody has as much invested in your financial future as you do.
Brian O'Connell is an investment analyst at Investing Daily, and the chief investment strategist of the 401K Millionaire. An ex-Wall Street bond trader, he has appeared as an expert financial commentator on CNN, NPR, Fox News, Bloomberg, CNBC, C-Span, CBS Radio, and many other media broadcast outlets, and is the author of two best-selling books on retirement investing.
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