Dear Carrie,
I can't help but feel worried about the coming year and how all the political changes may affect my finances. I don't have a lot of money, but I want to be smart about handling and protecting what I do have. Is there anything specific I can do? --A Reader
Dear Reader,
I'm getting a lot of questions from readers who are understandably apprehensive about what's in store for their money in the coming year. So much is up in the air: taxes, interest rates, health care choices and costs, the future of Medicare and Social Security. All of these things have the potential to impact the economy, the financial markets--and our wallets.
But here's some good news. Although we can't predict or control the future, we can prepare ourselves by sticking to some time-tested basics of money management. After all, even though we may not be aware of it, we all live with uncertainty every day. Always have, always will.
The best way I know to feel more in control is to take action. So here are some thoughts on things you can do to help ease your anxiety. Even as market forces change, these principles hold true. In fact, it's in times of uncertainty that they're probably the most valuable of all.
Don't overreact
Regardless of what's happening in government or politics, don't panic. Think back to the dramatic market decline of 2008. It was an extraordinarily stressful time, but the investors who suffered long-term were those who panicked and sold at a low.
So don't let your emotions lead you astray. Instead, let your situation, your personality, and your goals be your guide--and choose your investments accordingly. Money that you know you'll need in the next three to five years shouldn't be in the stock market. And if you're close to retirement, make sure you have a healthy cash cushion.
Cover these basics
The unknown is always a little scary but there are some basic things you do have control over no matter where the political or economic winds blow. Here are three practical ways to protect yourself:
- Beef up your emergency fund. Everyone should have an emergency fund to cover at least three to six months of necessary spending. But if you're feeling uncertain about the future, and especially if you're nearing retirement, you may want to increase your cash reserves even more.
Rebalance your portfolio
Periodic rebalancing is always important--but it's probably even more crucial when markets adjust. This is because as "winning" investments gain in value and take up a larger portion of your portfolio, other investments shrink in comparison. This will change your asset allocation, potentially exposing you to increased risk.
One way to compensate is to sell a percentage of the asset classes that have performed well and use that money to buy more of the asset classes that have done poorly. This way, you're not only taking profits, you're actually buying low and selling high. Alternatively, if you're adding money to your portfolio, you can invest in categories that have underperformed. Sounds counter-intuitive--but rebalancing is a cornerstone of smart investing.
Make a plan
Numerous studies have shown that planners prevail. They set goals, establish priorities, and obtain more wealth. To me, this just makes sense. Managing your money is too important to leave to chance.
If you've never worked with a financial planner, this could be your year. A financial plan can be a great way to organize your finances and make sure all the pieces are working together. Or if you're not ready to go the formalized route, at a minimum take a hard look at your goals (Retirement? A new home? College?), and then crunch the numbers to make sure you're on the right path.
Change can be disconcerting but it can also mean new opportunities. Yes, there are unknowns ahead. But if you're smart and diligent, you'll not only be able to roll with the punches and protect your money, you'll be able to help it grow.
Looking for answers to your retirement questions? Check out Carrie's book, "The Charles Schwab Guide to Finances After Fifty: Answers to Your Most Important Money Questions."
This article originally appeared on Schwab.com. You can e-mail Carrie at askcarrie@schwab.com, or click here for additional Ask Carrie columns. This column is no substitute for an individualized recommendation, tax, legal or personalized investment advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.
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