President’s MessageBruce Doole
May 8th, 2014
Measure Progress Toward Your Long-Term Goals
While investment performance is important, long-term financial success depends on a lot more than what “the market” does from year to year.
Step 1: Benchmark your portfolio’s performance
First, assess the performance of your portfolio as a whole, including all your taxable and tax-deferred accounts. Compare your portfolio’s actual performance in 2013 (accounting for any deposits or withdrawals during the year) to a benchmark return of appropriate market indexes weighted to match your target asset allocation.
To get an idea of how your portfolio performed relative to the market, compare the benchmark return to your portfolio’s actual return. Chances are some areas of your portfolio did better than others, which is fine. It’s not likely every area will do well at the same time—that’s why it’s critical to be well diversified across (and within) asset classes.
This is also a good time to rebalance your asset allocation back to your long-term target if you haven’t already done so. With the tax-law changes we’ve seen over the past few years, you may be able to give yourself an additional edge by knowing how to allocate your assets between taxable and tax-advantaged accounts.
Step 2: Measure the performance of individual investments
Once you see the big picture, you’ll want to see how each of your stocks, bonds and mutual funds performed in 2013 relative to their appropriate peer group and index.
Step 3: Assess your personal net worth
Start calculating your personal net worth by totaling up all your assets. When you’re calculating your liabilities, you should examine what you currently owe, but also what you’ll owe if you sell any of your assets. Finally, complete the picture with a statement of personal cash flows—all sources of annual income minus expenses.
Remember, the amount you save is critical to achieving your long-term goals and growing your personal net worth over time. That’s why it’s smart to budget in your savings target as a non-discretionary line item on your cash flow statement.
Step 4: Make or update your savings and investment plan
Measuring progress toward your goals is difficult, if not impossible, when you don’t have a plan. Putting one in place involves assessing your current situation, identifying your goals—retirement, college funding for children and so on—then formulating a savings and investment plan to help you reach them, as well as a distribution plan to fulfill your goals. Of course, no matter how good your plan is, it won’t be of much help unless you take action.
A sound plan, properly implemented and monitored along the way, can increase your chances of achieving your goal—as you find the right balance between working toward your future goals, including a secure retirement, and enjoying the here and now.
Source: Charles Schwab