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3 Year End Questions Investors Should Ask Themselves about Their Goals

Investment Questions to Ask YourselfAs the year draws to a close, we race to get those last-minute chores taken care of before the holidays descend in full force. Now may be a good time to take stock of how your investment goals have weathered this past year with so much instability in capital markets. I always like to say that goals-based investing is a marathon, not a sprint. But a good marathoner knows to take periodic stock of the stretch of road just run, the current state of things, and the lay of the land ahead. The trick is to do this in a disciplined way. Panicking at the 9-mile mark and overextending yourself over the next two miles is a recipe for disaster down the road, as mile 26.2 looms directly ahead. Likewise, a sober assessment of how your portfolio has fared in the past twelve months should not lead to a frenzy of ill-advised selling that you will regret later. Remember, those paper gains and losses are likely to change over time. Three questions are important:

(1)    Are my long-term goals the same as they were at the beginning of the year?

Life changes and goals change. Now is the time to take stock of what happened over the course of the year and how that affects your long-term objectives. Some of these life changes are of the “large and obvious” variety – if you have a new baby, the chances are that you have thought more than once about changes to near-term living expenses and higher education down the road. But there may be other life changes where you have not actively made the association with financial planning. It is a characteristic of human behavior that we tend to create arbitrary mental categories to deal with different aspects of our lives. “College, second home, retirement” may be the mental buckets we associate with investment planning. But what about something else like a career change or a different balance between your primary job and other pursuits? These may also have longer-term financial implications. Year-end is a great time to take a broad view of everything that has happened in the last twelve months and what that could mean financially, down the road.

(2)    What is the time horizon to my nearest-term goals, and is my portfolio still in a strong position to deliver on those goals?

If your nearest-term goal is retirement and you are now 25 years old, then the twelve months that have elapsed since the beginning of the year are a relative drop in the bucket. Those twelve months loom considerably larger if you are looking at the approaching need to start shelling out tuition dollars for that elite New England liberal arts college your 16 year old daughter is so excited about applying to. Of course, it is impossible to work miracles when short-term market variability is at play. The important thing here, if you sense possible liquidity issues, is to look for ways to reduce portfolio volatility. The biggest danger in planning for very near-term goals is that adverse market conditions may surface on the very day you have a major liquidity event. Look for ways to reduce portfolio risk without unduly jeopardizing the return objectives.

(3)    What developments in the capital markets should I be aware of in view of the appropriateness of the assets in my portfolio to deliver on my goals?

One of the big challenges for every investor in today’s market climate is that fundamental assumptions about asset valuation and performance are under attack. The “buy and hold” approach that worked so well for most of the past 30 years, where any significant contractions in risk asset indexes were opportunities to buy ahead of the next rally, has morphed into something much harder to manage. The “risk on / risk off” paradigm, that has become the dominant market characteristic, favors the short-term antics of high-frequency institutional traders not long-term goals-based investors. Global relationships are also changing. The normally stable markets of Western Europe are engulfed in an economic crisis that seems likely to go on for a while. And even the vibrant markets of emerging Asia Pacific nations are beset by higher than average volatility and potential threats to near-term growth. These developments have an outsize impact on capital appreciation. So, it is useful to remember that capital appreciation is only one source of asset value, the other being dividends or interest. Look at the growth – income balance of the assets in your portfolio and think about whether it might make sense to undertake some strategic re-weighting. In fact, watch for my upcoming post in January that will provide tips for asset allocation at the beginning of 2012.

Running through a brief sanity check based on these three questions can give you some peace of mind before you set out the holiday punch and kick off the festivities. Remember, it’s a marathon and not a sprint. Attend to the present but keep your eyes focused down the road.

How do your goals look as 2011 draws to a close?

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