Monday, May 2, 2011

Quarterly Financial Checkup

Every three months I perform a checkup on my primary retirement account.  (My google calendar sends me a reminder so I don’t forget.)  I review the account to see how my money is performing and to make sure that my investments are still in-line with my desired target allocation.  Depending on how my account has been performing, I either: leave the account alone, rebalance, or reallocate.


The question isn't at what age I want to retire, it's at what income. ~ George Foreman
Asset allocation is arguably the most important factor to long-term investment success.  The major factors for determining the proper allocation are age, risk tolerance, and time horizon.  When you are young and saving for a retirement decades away you can afford to invest more aggressively.  This is because you have lots of years to recover if the markets go down drastically.  So basically you can have more money invested in stocks as opposed to safer investments like bonds.   

Not having to worry about money is almost like not having to worry about dying.
~ Mario Puzo
When you reallocate your account it means that you change the allocation you set at an earlier time as opposed to rebalancing.


You can be young without money but you can’t be old without it. ~ Tennessee Williams
Rebalancing is when you return the holding within your account to its original contribution allocation.  For example, if your desired asset allocation is 70% stocks and 30% bonds but the your stock investments have outperformed your bonds your asset allocation could have inadvertently become 85% stocks and 15% bonds.  That allocation would be much riskier than you desire.  When you readjust your levels back to 70-30 you are essentially selling high and buying low.  The goal for any investor.

Preparation for old age should begin not later than one's teens. A life which is empty of purpose until 65 will not suddenly become filled on retirement. ~ Arthur E. Morgan
Periodic rebalancing is very important to avoiding necessary risk.  Experts recommend rebalancing your accounts at least once a year or whenever your investments get more than 5% out of whack of your intended allocation.      
The retirement plan provided by my employer, called the Thrift Savings Plan (TSP), allows me to contribute to five different funds.
  • G Fund - The G Fund invests exclusively in a nonmarketable short-term U.S. Treasury security that is specially issued to the TSP. The earnings consist entirely of interest income on the security.
  • F Fund - The F Fund invests in a bond index fund that tracks the Barclays Capital U.S. Aggregate Bond Index. This broad index includes U.S. Government, mortgage-backed, corporate, and foreign government (issued in the U.S.) sectors of the U.S. bond market. The earnings consist of interest income on the securities and gains (or losses) in the value of the securities.
  • S Fund - The S Fund invests in a stock index fund that tracks the Dow Jones U.S. Completion Total Stock Market Index. The earnings consist of dividend income and gains (or losses) in the price of stocks.
  • C Fund - The C Fund invests in a stock index fund that fully replicates the Standard and Poor's 500 (S&P 500) Index. The earnings consist primarily of dividend income and gains (or losses) in the price of stocks.
  • I Fund - The I Fund invests in a stock index fund that fully replicates the Morgan Stanley Capital International EAFE (Europe, Australasia, Far East) Index. The earnings consist of gains (or losses) in the price of stocks, dividend income, and change in the relative value of currencies.
At the start of the checkup:
I get paid bi-weekly.  With each paycheck a percentage of my pay goes directly into my retirement plan.  Going into this quarterly checkup my contribution is being split between three funds.  (30% C fund, 30% S fund, 40% I fund)


The best time to start thinking about your retirement is before the boss does. ~ Source Unknown
Based on the performance of the funds, the current distribution of my funds varied slightly from my desired asset allocation.  (29.69% C, 33.04% S, 37.27% I)


God's retirement plan is out of this world. ~ Source Unknown
Typically, I would just rebalance my account back to my 30-30-40 allocation and call it a day, but since the market has been on great run the past few years.  I’ve decided that now is a great time to reevaluate my asset allocations.


Welfare is not a retirement plan. ~ Ernie J. Zelinski
After reviewing my account I decided I should reduce my risk.  Instead of being 100% invested in stocks, I’m going to pare down to only 88% stocks and the remaining 12% will be split between the G and F funds.  


As in all successful ventures, the foundation of a good retirement is planning. ~ Earl Nightingale
The 88-12 split was determined through a simple calculation financial planners use to determine an appropriate asset allocation.  To determine the ideal allocation for you subtract your age from 120.  The difference is the amount you should have invested in stocks.  (Some planners subtract age from 100.  I prefer 120 because it adds a little more risk without being too aggressive.)     

Always invest for the long term. ~ Warren Buffet
After the checkup:
I adjusted my current holdings and future contributions to the following mix: 6% G fund, 6% F fund, 29% C fund, 30% S fund, 20% I fund.  
These moves will slightly reduce my risk if a market downturn occurs while still allowing me to benefit from future market advances.  During the past 12 months I've had an 18.93% rate of return.  Hopefully the next months are just as successful!

Good Luck with your investments... 

...and remember you are never too young to start thinking about retirement!

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