During our first meeting John and Patty described successes with their investments over the previous year. They had purchased Apple stock and it was up more than 100% and their 401(k) accounts had increased in value 33%. However, they were still uneasy with their savings and investment plan; believing they didn't know how to better understand and evaluate gains/losses and make wise investment decisions. After doing a review we found:
- The Apple stock had increased in value 109%. However, the stock only represented 5% of their investments.
- Their 401(k)s had increased 33% but 15% of the increase resulted from contributions, not gains.
- The overall net gain based on all combined savings and investments was just under 4%.
- In the same period the DJIA and S&P 500 had averaged about 19% gain.
The purpose of a financial plan is to provide a road map for financial sustainability. Most often that includes savings and investments. It's important to track investment (gains/losses) and verify performance. Scheduled systematic reviews provide trigger for action to help keep financial plans on course.
How much time and attention is required to manage a savings and investment plan? With as little as one hour a quarter most household savings and investment plans can be evaluated well enough to determine whether or not additional action is required.
If quarterly reviews are too great a burden, perhaps hiring a professional should be part of the plan.
The key factors for successful periodic savings and investment evaluation are manual input and consistency. One of the most gratifying aspects of my work is witnessing the boost in financial confidence and competence when clients discover their capacity for this exercise. Here is a sample of a quarterly tracking report:
Sample: Sustainable Investment Quarterly Tracking Report
What skills are required? First, enough skill to pull together statements for all savings and investment accounts for the month-end of each quarter (March, June, September, December). Second, the ability to identify and post account balances and contributions (payments) and withdrawals (distributions) during the quarter. That's it, easy!
Using the Quarterly Tracking Report provides adequate information to determine:
(1) Net gains and losses for each account. The spreadsheet discounts gains and losses associated with contributions and withdrawals in the period. It's less than perfect but better than most methods.
(2) The comparable value provided by pay-down of mortgages.
(3) How combined gains and losses for the quarter effected overall net worth. In other words, the net gains and losses based on allocations.
My clients, Bob and Renee, had contributed to their retirement accounts and saved for 20 years, never really monitoring their gains and losses. They had done well, with enough savings and investments to retire at 60 years old. They began to monitor their accounts on a quarterly basis and it lead to consolidation of their retirement funds and a significant reduction in fees. They are no longer easily discouraged by low returns on their most conservative allocations. Nor, are they emotionally attached to the volatility of their more aggressive investments. They now have the capacity to make higher quality, more well informed investment decisions.
January is a great month to establish a regular schedule for systematic review of savings and investments. Begin by collecting all 2010 year end statements and post balances as of January 1, 2011. Then, at the end of the first quarter, March 31, 2011 complete your tracking report. I'll include a reminder in the March newsletter.
Visit my website to download a Quarterly Tracking Report or Email me at Susan@moneytalksllc.com if you would like it sent to your mailbox.