How to: Prepare your portfolio to weather uncertain times

By Michael Matty, CFA, CFP, Chief Investment Officer, St. Germain Investment Management, Special to PRIME The recent swings in the market averages have caused many investors to wonder what changes they should make to their retirement portfolio. The answer, if your retirement portfolio is properly structured, is that you should probably do very little. In fact, if your retirement portfolio is properly structured, it is very unlikely that short term market or news events would ever necessitate a change. Note that the above answer states if your retirement portfolio is properly structured. How do you know whether your current allocation to stocks, bonds and cash is correct? If you are doing it yourself, one simple test may be to ask yourself if you even know how you are allocated. What percentage do you have in stocks, bonds and cash? What's in that IRA or 401K? It is a difficult question for many people to answer, because in addition to their current 401k, many people have multiple IRA plans, and possibly several old 401k plans. Oftentimes these IRA plans were opened in a rush at tax filing time, with very little thought given to the actual investment. As a result, we see many people with no cohesive plan to their investments. In fact, they quite often have no real idea what investments they currently hold. And therein lies the problem. How can you expect your plan to get you to your goal if you don't even know where you are now? Figuring out where you stand So as a first step, it is essential to stop and assess where you are now. How much do you have, and what is it invested in? All your year-end statements should still be fairly accessible. Gather them up and get a snapshot of where you are now. Depending on the number of accounts you have, and the types of investments in them, this may be very simple, or it can get fairly complex. But one thing you may realize right away is that you probably want to combine these old accounts to help make this step easier next time. Setting goals Now that you know where you stand currently, the next step is fairly easy: establish your goals. How long before you want to retire? How much do you need annually in retirement? What sources of income will you have in retirement? What about potential nursing home expenses? And what other special circumstances or needs do you have? Handicapped child? Elderly parents to care for? Expensive second home? Planning to succeed Now you should have a rough idea of where you stand, and an idea of where you are going. The most difficult step of all comes next, and that is establishing a plan to get you to your goal. Because of the many unique circumstances which exist, there is no "one size fits all" solution, or even a good rule of thumb. And most of the rough guides you have heard are probably wrong, given that many of them were formulated when retirees had decent company sponsored pensions, shorter life spans and being 65 meant you were old. Going online and doing some research will help educate you. And a visit with a financial planner can help you get established with a good plan. The most common mistake people will make, however, is to be too conservative. Count on living to 90 or 95, and plan on incurring some fairly healthy expenses, even in retirement. Having put aside too much for retirement is a far easier problem to solve than not enough! You're in for the long haul The benefit of sitting down and going through the above exercise is that you will become comfortable with the fact that your retirement plan is allocated in conjunction with your long-term goals. This typically makes any short-term market disruption easier to ride out, because you become focused on managing your money to last decades, not with a view of reacting to the daily news. And by following your plan in a disciplined manner, consistent with your long term goals instead of knee-jerk reactions, your odds of success go up. So what do you do in uncertain times? Assuming you already have your plan in place, a market sell-off should cause no real distress and require no change. But on the bright side, it may provide you with an opportunistic chance to get this year's IRA contribution put to work while the rest of the world worries. Column provided to PRIME by: St. Germain Investment management; 1500 Main Street, Springfield, Mass. Phone is 413-733-5111 or 1-800-443-7624. web site: www.dgstgermain.com