In the previous post, we started to look at what you need to do to review your financial goals effectively. In this blog, we'll look at some other steps to take.
Decide on Actions
What are the adjustments? Ultimately what it’ll come down to is that you need to adjust your savings rate, as this is easily the biggest lever under your control. Let’s say that markets have had a rough year, and on completing your calculations, you realise you’re going to have to find another £50 per month to hit your goal.
Assuming you can find that, then you can satisfy yourself somewhat by knowing that your extra £50 and the money you’re used to saving each month will be buying more shares while the markets are down. And that could mean that at your next review, you could dial things back down again.
I actually suggest that you don’t do that, however. If, as a result of your calculations, you realise that you are actually saving more than you need to, I would keep the savings where they are and hit your goal early, or build in some protection against future market drops.
I’m not planning to cover much about your investment approach. I’ve covered how to review an investment portfolio before, which you can listen to here. But one key factor that is easy to do is to rebalance your funds. Assuming you hold more than one fund, then chances are the split between them has got out of whack over the past year.
Let’s say you follow Lars Kroijer’s model of holding a 100% equity tracker, balanced with some gilts. If share markets have been buoyant, chances are that the equity portion has increased from where it started as a proportion of the whole. While it can be tempting to just enjoy the ride northwards, what you will end up with if you leave things unchecked is a portfolio which bears little relation to what you started out with; one which is more equity-heavy compared to what you set up initially.
Rebalancing is simply the process of resetting things to your starting position. If you think about it, this entails selling better performing assets to buy lesser performing ones. Counterintuitive that may be, but it’s an important discipline for keeping any future nasty surprises at bay.
What you need to be very careful of is looking at the performance over the past year and thinking that you need to increase the risk of your portfolio to try and hit your goals. Remember that volatility can be very uncomfortable, so certainly don’t increase your risk beyond what you might be able to bear, just so you can possibly hit your goals. Far better in my book to tweak your savings rate than to play with the risk.
Review Your Protection Programme
This is your foundation of insurance, what your wealth is being built upon. It ensures that, if the worst happens to you, your financial future plans need not be completely derailed. It’s really important, so include it in your review. You’ll know if something has changed in your circumstances that might warrant a change in your protection programme. Think of the risks:
- What if you die? Will your current life cover pay off all your debt and provide for your loved ones?
- What if you can’t work? Has your income increased such that you need to review your income protection?
- Have you changed your job?
- Do you have more cash set aside so maybe you can extend the deferred period on your income protection cover? Maybe you should let your income protection provider know? If in doubt, call them and ask
- What if you get something really nasty but doesn’t kill you? Your income protection insurance is the key cover here, but maybe some critical illness cover is needed now
Punch your numbers back into the insurance need calculator and compare your existing cover with the output there. If an update to your programme is needed, then call your existing insurance companies, or financial adviser and get things updated.
Set Date for Next Review
Finally, reset the date for your next review. Stick it in your calendar with a reminder a day or two before, so you can get the information you need together, though I imagine it won’t take long for most of us. Commit to doing this regularly. Maybe choose the same day every year. I’ve recently listened again to The Simple Path to Wealth by J L Collins, and he talks about reviewing his finances once a year on his wife’s birthday.
That's all for reviewing. Click here to move on to the next series – accelerating your progress.
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