Now what? What to do after you set up an investment account

Whether you recently enrolled in a 401(k) at work or opened a Traditional IRA, often it can be very hard to determine what to do after you set up a new investment account. Below are steps you can take today to not only choose the investments but to review the progress.

What is your goal?

The first thing you must make sure you’re clear on is the purpose of the account.  Why did you set up the account? Was it to save for retirement? Was it to save for education? Was it to save for a dream home or a dream vacation? Knowing the goal for the account can help guide the investment options available for you. You wouldn’t invest a college savings account the same way you would a dream vacation account.

Regardless of what the goal is for the account, when it comes to investing you want to strike a balance between how accessible your money will be, the risks involved with each investment and the return you expect from the investment. When you take these three things into consideration you can create a portfolio that will meet your investment goals.

Understand your time horizon

The next thing you need to keep mind is the timeframe you will need the funds you invest, i.e. your time horizon. Do you have a general idea of when you’ll start to make withdrawals? Ideally, you have at least 5 years until you need to start making withdrawals. The shorter your time horizon the more you should consider safer investments. If you have a longer time horizon, you can afford to take some risk in exchange for the potential higher return.

What is your risk tolerance?

Speaking of risk, one of the first concepts you should familiarize yourself with is that of risk tolerance. How much risk are you comfortable with when it comes to your investments? If you woke up tomorrow and the market was down 20%, would you be tempted to sell everything? Even if you’re primary goal for your investments is preserving your principal, you may need to take some calculated risk to get return necessary to outpace inflation. If you’ve never determined your risk tolerance, check to see if the company you’re using for the account you created has a risk tolerance tool if not, take our risk tolerance quiz here .

Create an investment roadmap

Next, it’s time to create your investment roadmap. What guidelines will dictate your approach to investing? You can use an investment roadmap to create the framework for your investment plan. Use it as a guide to: 1) identify the criteria you will use to make investment selection, 2) note your Risk Tolerance and the asset mix of your investments 3) come up with a system for monitoring and reviewing your portfolios.  You can use this Investment roadmap workbook to create one for yourself.

What will be the mix of investments?

You’ll notice that part of creating your investment roadmap is identifying the mix of assets that will be part of your portfolio. Why? When you hold different types of assets, it will make it easier to withstand the ups and downs of the market. Your goal should be to have assets (stocks, bonds, cash) that move in opposite directions, i.e. negatively correlated assets. Correlation is just a measure how similarly or differently two types of assets behave in a particular environment. When two types of assets always move in the same direction (up together or down together) they have a correlation of 1. Example of a portfolio with negatively correlated assets would include Treasure bills and stocks when interest rates are high because they move in opposite directions.

Do your research

Once you’ve identified your asset mix, it’s time to do a little research. Try to keep your investment selection as simple as possible. If it all possible, find a mutual fund or ETF that aligns with your risk tolerance and your asset allocation mix. Choose a few funds and do a little bit of research.  Start with the tools and resources of where you set up the account. What you may consider doing is reviewing their recommended portfolios based on risk tolerance. There are a number of firms that provide a list of funds you can choose from based on your risk tolerance. Some of these firms include Fidelity, Vanguard, T Rowe Price. Some things to review and picking mutual funds: 1) performance. How as the fund compared to its peers and it’s benchmark? 2) the expense ratio. The expense ratio is how much of your investment will go toward paying the fund’s expenses. You want a fund with an expense ratio of less than 0.75. 3). how long has the manager of the fund been in charge of the fund? If fund has high turnover, it may not be a good idea to pick that particular fund.

A few other items to keep in mind after you’ve made your investment selections. Keep an eye on fees. It’s very easy for your return to be eaten away by fees, not just by the individual investment fees but also account fees so always keep that top of mind.  Do your best to automate your investing plan. Schedule regular contributions to the account to ensure you’re always growing your account. Lastly, don’t forget to review your account at least once a year. When you review your account, check to see if the current allocation mix still aligns with your original mix when you set up your account? If not, has there been a major life event that requires a change in your asset mix (ex. Recently retired)? If not, rebalance your portfolio. Rebalancing is when you sell or buy investments so that your current portfolio is aligned with your original asset allocation.

If you take the steps above, you’ll be more than well-ahead of the curve in growing your wealth. As always, send me a message if you have questions.