Build a Solid Financial Foundation
When the markets and the economy are behaving badly, as they tend to do from time to time, it's easy to feel helpless. But creating a solid financial foundation can help you gain control of your investments and possibly avoid mistakes that can sabotage your portfolio.
Your Net Worth -- A Place to Start
Having a current picture of your finances is an important first step in building a solid foundation. By determining your net worth at the same time every year, you'll know what sort of financial shape you're in and whether you're making progress toward your goals. To find your net worth, list all of your assets, including bank and investment accounts, real estate, retirement plans, life insurance, business interests, etc. Then subtract your liabilities, such as your mortgage, credit card debt, loans, etc. The amount that's left is your net worth. If you don't like the number, look for ways to either decrease your debts or increase your assets.
Lost Without Them
Setting specific goals can help you focus your investing efforts. Prioritize the goals you've set according to their importance and your time frame for needing the money. Keep in mind that the goals you have now will probably change over time, so be flexible. Revisit your goals periodically and revise them when necessary.
Make It Personal
You can't control what happens in the economy, but you can control your own behavior. Instead of worrying about whether the market is up or down or which investments will be hit hardest by a decline, think about the things you can do that could make a difference. Investing money on a regular basis or adjusting your portfolio's asset allocation are steps that can help put you in control.1
Good Behavior
Think about creating a written investment statement that describes your risk tolerance, rebalancing schedule, and reasons for selling an investment.2 Having guidelines to follow can keep you from making mistakes that might thwart your plans. You might also want to review your own financial track record. Tax returns and brokerage statements can tell you a lot about your past successes and failures. Keep in mind that past performance is no guarantee of future results.
Source/Disclaimer:
1-Asset allocation and dollar-cost averaging do not assure a profit or protect against a loss. Dollar-cost averaging involves regular, periodic investments in securities regardless of price levels. You should consider your financial ability to continue purchasing shares though periods of high and low prices.
2-Consider the tax consequences when selling investment shares. Rebalancing strategies may involve tax consequences, especially for non-tax-deferred accounts.