It is hard to believe that another year has come and gone. For a lot of us, open enrollment season is just wrapping up for most benefits. We know that you have been bombarded with lots of information and decisions that need to be made. As the end of the year approaches, we want to give you a few housekeeping items for your financial life.
Give yourself a raise – In some cases at the end of the year, there are bonuses given and sometimes there are pay raises. This is a great time to think about yourself, to be more exact, your future self. The reason this is a great time to do that, is that you haven’t seen the money yet, so it is a great way to save a little extra for your future-self, and still have money to use now. So, consider giving your 401(k) contribution a boost, your future-self will love you for it!
Check your risk tolerance – This year has brought with it volatility, or big moves in the stock market. We came out of the chute hot and then had a considerable cool down only to rev back up and come back down. It isn’t the big move up that concerns most of us, it’s the move in the negative direction that no one likes to see. How do you handle risk? We know that markets are going to move up and down over the course of a year. What we need to decide is what is the amount of up and down movement we are willing to take. To help, lets look at stocks and bonds over the last 31 years:
The average annual return for S&P 500 (stocks) is 11.49%. The highest return was in 1995 and was 37.60% and the worst year was 2008 at -38.28%. During this 31-year period, there were five years in which stocks had negative returns
versus 26 years of positive returns; that means 84% of the time a positive return occurred; not bad odds having good things happen to your investments.
Now, let’s look at bonds using an Intermediate Bond index – the Bloomberg Barclays U.S. Aggregate Bond index – the average return was 6.40%. The best rate of return occurred in 1995 at 18.50%; while the worst year was in 1994 with a return of -2.90%. Only three times during this 31-year span did the bond index deliver negative returns. The odds were even more in your investment favor with a positive outcome over 90% of the time.
As you can see from that examples above stocks have a higher rate of return, but also a much deeper draw down. Bonds provide a lower, but more consistent rate of return. The mix between stocks and bonds is important, the more your portfolio is weighted to stocks the more up and down movement you will have, but the possibility for a better return over time. The more weighted to bonds the less up and down movement you have, but a lower rate of return. Check to see how you are invested, and make sure that you are comfortable with the risks to get a return.
Plan for next year – As the end of the year approaches, now is the best time to review the previous year and to make plans and adjustments for the upcoming year. There will be unforeseen events that will occur in every person’s life. While we can’t prepare exactly for each event, we can prepare in a general sense by putting money aside in an account that is designated for the unforeseen. We are describing an emergency savings account. If you don’t have one already, start one, if you already have one, is it where you want and need it to be? Look forward to the future with hope but be prepared for whatever might come your way.
We hope you all have a wonderful Holiday Season and an even better 2019!