1. Get the Most from Your Cash:
If you have cash in a money-market fund, you know you're not making much money. You can probably do better than you think if you're willing to do a bit of shopping.
2. Shop for Interest Rates:
If you have money in a bank, find the highest interest rate you can to protect you against inflation.
3. Review Your Emergency Fund:
This should be money you don't think you will need any time soon. Try to make this money work harder for you.
A short-term bond fund will pay more than a money-market fund without much additional risk. If you think you probably won't need this money for four or five years, consider using a fund that owns both stocks and bonds.
4. Check Your Asset Allocation:
The way you allocate your assets is the most important investment decision you will make. Your investment plan should specify your percentage allocations between fixed-income and equity investments.
Within the equity part of the portfolio, you should have target allocations for funds as well as for big-company stock funds and small-company stock funds. Your plan should also specify how much is to be in value stocks and how much in growth stocks.
If you have a financial advisor, set up a meeting to evaluate your current allocation. The advisor can suggest any necessary changes.
5. Rebalance your Investments:
When equities seemed to go through the roof, your investments may have taken you some distance from the proper allocation you determined for yourself.
If you began the new year with a portfolio equally split between stock funds and bond funds, you might be able to change it with about 60 percent of your total in equities and only 40 percent in fixed-income funds. What's wrong with that? Too much risk. A portfolio with 60 percent in equities is riskier than a 50-50 portfolio.
Rebalancing gets you back on track. And thereʼs another benefit:
By rebalancing you will be taking some of last year's profits "off the table" and spreading them around. This is called buying low and selling high. Rebalancing makes it automatic.
Maybe you think you're already properly diversified. But the vast majority of portfolios are not that well put together. Most portfolios are heavily over weighted in large-cap growth stocks. That may seem fine in a year like the one we just experienced.
But diversification pays off in good times and bad. It's a rare investor whose equity portfolio couldn't be improved by adding one or more of three kinds of funds:
Value, small-cap and international.
7. Determine Your Investment Policies:
Make a written investment policy statement for yourself. Investors who actually do this are far more likely to attain their goals than those who just casually think about it.
Writing a policy statement requires careful thought, but once it's done it will remind you rationally, when the market is trying to manipulate your emotions, what you should be doing and why.
8. Set Measurable Goals:
Write down your long-term financial goals and make a written retirement plan. That plan should specify a target year you want to retire and estimate how much retirement income you will need from your investments.
From there, you'll be able to tell how big your portfolio will have to be when you retire. For a quick rule of thumb, figure that on the day you retire, your portfolio should be 20 times the size of the annual income you want from that portfolio.
9. Make Specific Plans:
If this is starting to sound like serious work, then you're getting the point. There's no free lunch for somebody who would be a successful investor. But the payoffs from this step could be enormous. You could retire earlier or boost your retirement fund by hundreds of thousands.
At the very least, all this written work will give you a clear picture of where you stand so you don't need to rely on vague hopes or fears. Make a written pre-retirement plan showing how you will accumulate the nest egg you will need on your retirement day.
Finally, keep looking for more things you can do in the coming years to strengthen your financial muscles.