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The answers you get can help keep you on the right track to meet your goals.
IT’S ALWAYS A GOOD IDEA to touch base with your advisor at the beginning of each New Year to review your investments. But that’s especially true this year. Merrill Lynch’s Chief Investment Office (CIO) is predicting “powerful waves of change” in the markets and the economy in 2019, and you want to be ready for them.
To help you get the conversation started, we asked Niladri Mukherjee, head of portfolio strategy for the Chief Investment Office in Bank of America’s Global Wealth & Investment Management division, for some ideas and insights. “You’ll want to focus on two areas. First, discuss with your advisor whether you’re on track to meet your financial goals,” Mukherjee says. “Second, talk about whether any changes are necessary in your portfolio, given the current economic environment.” Consider asking the following five questions:
1. Am I on track to meet my goals?
“The main goal of a conversation with your advisor should be to review your financial strategy,” Mukherjee says. That strategy should be based on your specific goals and circumstances, including retirement. If you’re experiencing any major life events like a job change, marriage, kids or grandkids, make sure these are taken into account. And note that a thoughtful financial strategy addresses not just your assets but also your liabilities. “Have a discussion with respect to your credit situation, cash solutions and comprehensive banking needs,” says Mukherjee.
Being disciplined about your investment strategy will be key to avoiding costly mistakes.
2. How can I rebalance my portfolio to take advantage of the
changing market environment?
“We have been, and increasingly will be, in an economic and political environment that’s highly uncertain and complicated,” Mukherjee notes. As the markets shift and you consider how to respond, he cautions against overreacting. “Being disciplined about your investment strategy will be key to avoiding costly mistakes.” When rebalancing, focus on how far your portfolio may have drifted from the mix of stocks, bonds and other investments that you’ve decided upon for the short and long term. Given the volatility in asset prices in the fourth quarter of 2018, discuss with your advisor whether your portfolio is appropriately diversified.
3. Is my portfolio well-positioned to help minimize the impact of
volatility in the coming year?
“During times of higher volatility, higher-quality assets tend to outperform,” Mukherjee notes. For investors, that means favoring large-cap stocks over small-cap stocks, and focusing on companies with healthy balance sheets and strong competitive advantages. Mukherjee also believes that focusing on dividend growth may be a good option for many investors, as it offers the stability and growth of cash flows. As you focus on higher-quality assets, Mukherjee notes that U.S. equities may be preferable to international equities because of their higher return on equity and better overall growth fundamentals.
4. I may well need cash in the coming year—what’s the best way to
prepare for that possibility?
Given the recent volatility in the markets amid several economic and political uncertainties, Mukherjee notes that the equity markets represent a risk for those who need immediate access to cash. Keeping some of your funds in cash, which is paying higher yields now, or similar alternatives may be a good option. “For example, three-month Treasury bills are paying a 2.4% yield right now, compared with 1.3% last year and .5% in 2016,” Mukherjee says. He also notes that depending on your timing and needs, short-term corporate bonds are income-producing investments that can be bought in relatively short durations.
5. How might slower economic growth in the coming year affect my
plans to retire?
Continuing volatility is predicted into 2019. But, Mukherjee says, this is unlikely to affect your long-term plans. “These corrections are opportunities to rebalance,” he says. If retirement is an immediate concern, you may need to find a middle ground between protecting the gains you have worked hard for and maintaining investments in assets, such as equities, that involve a degree of risk, but are necessary for their growth potential.
Whatever the larger economic picture, having your specific financial and life goals in mind can guide you in your approach and help you and your advisor chart an appropriate course now and as market conditions change. Revisit these questions regularly as you meet with your advisor throughout the year.
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