We are starting 2016 amid heightened volatility and uncertainty on the capital markets. The Federal Reserve is likely to continue its interest rate hike efforts; the global economic slowdown could spill over to the United States; and the presidential election promises to bring theatrics and uncertainty.
I am often asked how market volatility can affect investor portfolios, and two things I think are certain about the capital markets. First, they are volatile. Second, they are unpredictable. So it should come as no surprise to us to see market corrections, and volatility is the rule, not the exception.
How do we get our own house in order so that these market fluctuations do not affect our financial planning success? Below are three financial resolutions for the New Year that will give you a good start into 2016.
1. Track your expenses. Whether you’re 22 years old and just graduated from college or a 65 year old new retiree, a good financial plan should recognize where your money is going. If you don’t currently have a detailed budget, spend the month of January keeping track of all of your expenses. Then, in early February, take stock and start drawing up a budget.
2. Create multiple “buckets” of investments based on a time horizon. One of the quickest ways to derail a financial plan is to sell and spend investments when they lose value. Markets will inevitably fall so building your portfolio based on when you actually need the money is crucial.
For example, money that you might need in the next five years would go into bucket # 1. This includes an emergency fund. These funds should be invested in very safe and stable assets. You need to be confident that the money is there when you need it. If you’ve invested short-term money in an equity fund, just bet that the market will rise upon liquidation.
Bucket # 2 can be money you need in five to ten years. So you can invest for more growth, but still need to be fairly careful with the investment to ensure that it increases in value when needed.
Bucket # 3 would be your long term investment. These accounts can be put on with more risk and long-term growth potential as you have time to weather the inevitable ups and downs of the markets.
3. Plan for market volatility before it happens, not while it is happening. Human emotions are one of the greatest enemies of successful long-term planning. Assess your appetite for loss before it happens. Then create an investment plan that takes your risk tolerance into account. Otherwise, you could make an ill-advised, emotional decision that could ruin your long-term planning goals.