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Tips for Making 2021 your Best Financial Year

Feb 18, 2021

1. Invest for Long Run

2020 has been a wild ride in all sorts of way. Certainly it has given a roller-coaster ride in stock market at the start of the year followed by one of the best bull market run from April 2020 onwards.

But I am aware of many who got scared by the wide moves and stood on the sidelines only to feel, with hindsight, missed out on the bull market rally. All the indicators I am following are showing that the bull market is likely to continue for many years - but don't be under any illusion that there won't be any drawdowns. This bull market will have some scary pullbacks along the way. But long term looks promising in my view.

These tips will aim to help you refine and redefine your focus to make 2021 the best financial year ever. The first one is focus on long term investing. Short term trading also presents great opportunity. Our members are benefiting from the regular watchlist and focus list that has been incredibly outperforming the market in the short term. But that may not be for everyone. Long term offers you less drama and more compounding growth.

The extreme bull run the markets (US Stock markets & some of the emerging markets) have had only increases the chances of more wild down moves when it comes. No one can predict when this will happen. But it is a matter of 'when' rather than 'if'.

There is little chance that the next bear market we encounter will be as short-lived, so we think it's important to mentally prepare for that now. Buying good companies and holding them for the long run can be key. Selling in fear when the market falls sharply is far more likely to end up hurting long-term returns. You can invest more if you have high conviction in a stock if it goes down. Or even better is to focus on buying the stocks that show good relative strength.

One way to prepare for the years ahead is for investors to take a look at their portfolios and make sure that anything they are investing in the stock market is money they don't need for the next three to five years. That way, investors can wait out any potential market declines and not have to sell when stocks are down.

I generally recommend that investors keep any assets they might need to access and spend in the next few years in cash or cash equivalents. It's true those funds won't have the option to earn higher returns in the market in that time, but the cautious investor also likely won't face the possibility of incurring significant short-term losses and perhaps not being able to meet those near-term spending needs.

2. Check Progress Toward Financial Goals.

When setting financial goals, being able to get even a ballpark figure of what might be needed to retire, take that trip around the world, or send children to college is great. Thinking about these things puts investors ahead of folks who don't have some kind of financial plan. Having a plan makes a difference.

Charles Schwab's 2019 Modern Wealth Survey reported 63% of investors with a written financial plan say they feel financially stable, while only 28% of those without such a plan report the same level of financial comfort. I encourage anyone to write a financial plan because that clarifies your journey and the path to take.

If you do have a plan or an outline of the financial goals you want to achieve, I believe you should take some time now to measure its progress.

Ask yourself: Am I on track to retire?

Likewise, retired people should ask:

  • Is my portfolio still able to support me through the remainder of my retirement?

  • Do I need to sock away more in my child's college fund?

  • Will I be able to afford a bigger house in the next few years?

  • Am I on track to remodel the kitchen this summer?

Achieving these types of financial goals requires planning up front and reassessment along the way. Taking time now to figure out a path to reaching financial goals can save investors from financial troubles further down the line.

3. Emergency Fund.

Year 2020 was a prime example of how life can sometimes throw everyone a curveball. And whether it be a sudden job loss, or a medical emergency, just about all of us have faced a significant unexpected expense at some time in our lives.

To keep these expenses from potentially blowing up any financial situation, I recommend having an emergency fund and keeping it in cash or easily accessible financial product for optimal liquidity. If individuals are still working, aiming to have anywhere from six to nine months of living expenses socked away is within generally recommended guidelines. Aiming for 9-12 months of overheads is even better (my preference).

For retirees, financial planning experts generally recommend that any living expenses needed in the next three to five years be kept safe in cash or cash-like investments.

If keeping that much money in cash is worrisome, there is the option of laddering those investments to squeeze out a bit more yield. For example, to construct that ladder:

  • Any assets that an investor needs in the next one to two years can be invested in a high-yield money market account.

  • Funds needed in two to four years could be invested in a series of laddered Fixed Deposits.

  • And assets that won't be needed for four to five years could be invested in a short- or intermediate-term bond fund, which could offer a slightly higher yield without a lot more risk.

Remember, cash is not an exciting investment, but it can be our best friend in times of turmoil. And that means investors might want to consider planning for that potential turmoil now, before it actually happens.

4. Consolidate and Pay Down High-Interest-Rate Debt.

Thanks to the COVID-19 pandemic, many have been forced to resort to credit to make ends meet or help fill gaps in lost income. And as a society, we are no strangers to the concept of incurring debt. While not everyone may be in a position to whittle away at their debt load at the moment, it does make sense for borrowers to take a look at what higher-interest debt they may be carrying.

It shouldn't be news to anyone that this is still a time of historically low interest rates. That means paying off credit cards, mortgages, and other types of debt might be a little easier thanks to lowered interest costs.

Borrowers should think about rounding up their liabilities and seeing if consolidating or refinancing makes financial sense. Some borrowers might be able to save thousands in interest payments or significantly reduce the term of loans. Borrowers can target their highest-interest debt to start with and see if there are ways to reduce that rate. We might not get such an accommodating interest rate environment again for a very long time, so don't let this opportunity pass by without assessing your liabilities.

Cut out all the excess spend and clutter you don’t need in your life The pandemic and the global lockdown has shown many of us that we have been spending too much on the things that we actually don’t need all this time.

5. Review Your Tax Situation.

Please note: All tax commentary provided here is for educational use only. For personal tax advice, please consult a tax professional.

Odds are many of us dread doing our taxes each year, but it is an unavoidable part of life. To avoid any nasty surprises come filing time, it is essential for taxpayers to ensure that they're withholding the correct amount from each paycheck if they're still working. Additionally, they might be interested in comparing any refund or liability owed for this past tax year, and, if needed, they may consider making adjustments to their withholdings to bring them in line with their expected tax liability for the coming year.

6. Reevaluate Insurance Coverage.

No one likes to think about the worst happening to them or their family, but that's what insurance is all about. We believe part of an annual financial check-in should include a review of existing insurance coverage. Households that might have experienced any meaningful life changes, such as a change in marital status, change in living situation, or even retirement might want to reevaluate their insurance policies.

Beyond evaluating whether life insurance coverage is sufficient, individuals might also consider any current levels of home or renters and car insurance, as well as health insurance, disability insurance, and long-term care insurance if applicable. Keep in mind that it is possible to be overinsured as well as underinsured, so taking time to review coverages each year can be a vital step in making sure assets are being put to their best use.

7. Estate Plans, Powers of Attorney, Health Directives, and Beneficiary Designations.

We strongly recommend investors consider estate planning — regardless of the size of any portfolio or assets. Doing so will help ensure these assets are directed properly in the event of your passing, as well as provide directions in the event of incapacitation.

Contacting a qualified estate-planning agent is probably the best way to tackle this task. We generally recommend that an effective estate plan include a will, power of attorney, an advanced healthcare directive, and perhaps a trust (we cannot provide legal advice, but an estate-planning agent will be able to assist in determining if this is something worth pursuing).

Once an estate plan is created, it likely won't need to be updated on a regular basis unless there is a significant change in life situation or circumstances. But it makes sense to do a quick check-in once a year to ensure that no updates are needed.

8. Portfolio Asset Allocation.

We at GrowWealth are stock pickers first and foremost, but investors shouldn't neglect their portfolio's aggregate asset allocation. While selecting individual stocks is a bottom-up approach to investing, asset allocation takes a top-down view, so we're confident that employing both techniques can really round out a total portfolio.

Asset allocation is an investment strategy that seeks to balance risk and reward in a portfolio by dividing an investor's money among various asset classes. Asset classes are categories like large-cap stocks, small-cap stocks, emerging-market stocks, real estate, bonds, commodities (if interested in investing Gold & other precious metals), Cryptocurrencies, and cash.

The idea is that an investor should assess their own goals, risk tolerance, and time horizon to develop an asset allocation that maximizes return and minimizes risk for them.

We believe allocation is important for two primary reasons. First, it can help ensure an investor has exposure to all the different corners of the investing market. For example, if a portfolio is comprised only of domestic stocks, it is likely missing out on all the returns that are potentially being generated by companies overseas. In this case, setting a target for international stocks in a portfolio can help ensure investors cover all their bases.

Secondly, asset allocation can help investors answer the question of how much risk is right for them. Obviously, an investor who is young and has decades until retirement will likely be investing differently than a retiree who is living on a fixed income. Allocation can provide a guide to hitting the right balance between riskier equities and capital-protecting cash and bonds.

And because markets are constantly moving and shifting, any investor's allocation will likely change over time. That's why we think it's important to rebalance back to asset-class targets on an annual basis. Doing this annually ensures that investors can take advantage of market movements while not racking up trades too frequently. We're confident that rebalancing is vital so that assets are deployed to the most attractively priced areas of the market.

An example of asset allocation based on our lead investor’s allocation (moderate to aggressive investor, has over 25years to retirement):

Individual equity/stocks: 58%

Equity Funds (International & Emerging economy equity): 10%

Commodities: 7%

Real Estate: 8%

Alternate Investments (e.g., VCT, EIS, SEIS): 7%

Cryptocurrency: 3%

Cash: 7%

Asset allocation can be a crucial investing strategy that can make the difference in an investor meeting or missing their financial goals. It only takes a few minutes for an investor to verify if their allocation is broadly in line with their time horizon and risk tolerance, and it could make a huge difference to a portfolio.

We have no idea exactly what 2021 will have in store for us as investors, but we want to be ready for whatever comes our way next. And that means taking some time now to prepare, make needed portfolio adjustments, and get our financial houses in order. Following our financial planning guidelines can help investors get set up to, we hope, have a productive investing year, regardless of what the markets might have in mind.

We think it's always better to have a proactive rather than reactive approach to financial health, so making an effort now to ensure success could save a lot of pain down the line.

Happy Learning and Successful Investing 👍


Article courtesy: Adapted from article by Amanda Kish, The Motley Fool.

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