Guiding Lower-Income Americans on Periodic Review and Adjustment of Investment Portfolio
Financial health is not about how much you make, it's about how diligently you manage it. Lower-income earners can remarkably grow their money by investing carefully. Better yet, periodic reviews and adjustments to your investment portfolio can do wonders. If you're unsure of how to go about this, no worries! Here's a step-by-step guide tailored for you.
Why Should You Periodically Review Your Investment Portfolio?
Investments aren't a set-and-forget affair. Market fluctuations, your personal finances, and life circumstances could change the suitability of your investment strategy. This is why periodic checks and adjustments are necessary, to ensure that your portfolio matches your present needs and future goals.
Step 1: Set Clear Financial Goals
Before reviewing your portfolio, first confirm your financial goals. Are you saving for your first home? Or perhaps securing college funds for your child? Whatever your objectives, they influence your investment choices and help you gauge whether you are on track or not.
Step 2: Understand Your Risk Tolerance
Understanding your risk tolerance is critical in deciding which investments to hold. Risk tolerance refers to your capacity to withstand potential losses in your investments. This can be influenced by factors like your age, income level, and financial goals. For instance, if your goal is to grow your wealth aggressively and you have high risk tolerance, you may invest more heavily in stocks. If you are conservative and want stable returns, bonds or savings accounts may be more suitable.
Step 3: Review Your Asset Allocation
After aligning your goals and understanding your risk tolerance, it's time to review your asset allocation. This refers to the proportion of each type of investment in your portfolio (e.g., stocks, bonds, cash). Your asset allocation should reflect your financial objectives and risk tolerance. For instance, if you're close to retirement, you might want to hold more bonds for steadier returns and lower risk.
However, over time, market fluctuations can change your asset allocation. Regularly reviewing it ensures that you maintain your target allocation, reducing risks and optimizing returns.
Step 4: Look at Your Investment Performance
Performance review is crucial in portfolio management. Examine the returns on your investments and compare them with their benchmarks. If your portfolio consistently performs poorly against the benchmarks or your goals, it might be time to reassess and make changes accordingly.
Step 5: Rebalance Your Portfolio
Imagine you initially planned for an equal split between stocks and bonds, but because of market changes, your stocks now make up 70% of your portfolio. This unintentional shift might expose you to higher risk. To guard against this, you might need to rebalance your portfolio by buying more bonds or selling some stocks.
Rebalancing maintains your desired risk level and asset allocation. However, it's important to do this sparingly to avoid excessive trading costs.
Step 6: Adjust Your Investment Strategy as Necessary
As life changes, your financial goals and risk tolerance might too. Major life events like having a new baby, buying a house, or changing jobs can alter your financial landscape. This demands adjustments in your investment strategy.
Make it a habit to review your investment strategy alongside your portfolio. This ensures that your investments are aligned with your financial needs and life circumstances.
Getting Help
Understanding investments can be challenging and the review process might seem overwhelming. If you're uncertain, it's okay to ask for help! There are low-cost financial advisors who specialize in helping lower-income investors. Online resources, free webinars, and community programs can also offer invaluable information.
Remember, everyone starts somewhere and every step you take brings you closer to your financial goals. As a lower-income American, making the most out of what you have is crucial. And periodic review and adjustments to your investment portfolio are key steps in that journey. Just know that with patience, commitment, and a little know-how, you have the potential to grow your wealth beyond imaginable limits.
