I was inspired by an article I just read by Ravi Nagarajan a fellow columnist on GuruFocus.com titledAchievable New Year’s Resolutions For Investors In 2010 to write a similiar article myself. I am a big fan of Ravi’s and he gave some very good advice such as selecting mutual funds with low fees, reading quarterly reports and ways to optimize cash yields.
I have some resolutions for the New Year for investors and myself in regards to asset allocation.
Maximize your 401K contributions
Many people work at companies that offer a 401K where the employer will match a large percentage of an employee’s contribution to their 401K. Sometimes employers offer up to 50% matching. This means that if you deposit $2,000 into your 401K your employer will deposit $1,000; it is mind-boggling that people do not take advantage of this. William J Bernstein states that if a bank offered $500 for every $1,000 that people deposited the bank would be mobbed, and there would likely be riots. However, when it comes to 401Ks people simply do not contribute to them. My advice is put as much money in your 401K as your employer allows. If you do not like the investment plans offered by the company, get other investment minded employees together to convince your boss to offer more options such as index funds from Vanguard.
Maximize your Roth IRA contributions
After maximizing out your 401K contributions put as much money as you can in your Roth IRA. The maximum is $5,000, and $6,000 a year for people over 50 and the deadline for 2009 is April 15, 2010. Therefore, people who have not contributed yet still have a few months to make up for it. Since the principal can be withdrawn tax free there is no reason to contribute unless you are in a high income bracket where it makes more sense to have a traditional IRA.
Make Sure to Rebalance
For anyone who stuck in the market, and had the nerve not to sell your stock portfolio has probably gone up significantly this year. It is possible that your portfolio might be higher than your ideal allocation level. (If you do not have an ideal allocation level, you should make one). Some people do not rebalance yearly, and prefer instead to do so every few years. However, even if you do not rebalance yearly it is still important to check your portfolio on a yearly basis. If you are a few years from your retirement and you want a 40/60 stock/bond allocation and it is currently 55/45 stock/bond allocation you may want to consider rebalancing soon.
Maximize Your Cash Yields
As Ravi pointed out in his article with the low yield environment today it is important to strategize how to get the highest cash return. If you do not need the money soon you should put your cash in a short term CD. It is better earning 1.5% in a CD, than earning close to zero in a money market fund. If you want to take slightly more risk and earn a higher return I would recommend placing money in a short term investment grade bond fund. I have some of my “cash” in vanguard’s short term bond fund which is currently yielding 2.4%. However, be careful because even though short term bonds are not very volatile you can lose your principle.
The point of making money is not solely to live comfortably, but to help others who are less fortunate. Everyone has a different charity that is close to their heart. I try to give up to 10% of my income to charity every year. I like to give some of my charity to an organization that helps childless couples conceives. Since I am blessed with a lovely daughter I want to help people who are less fortunate with me. In addition to helping others, Uncle Sam will allow you to deduct it from your taxes so it is really a win-win situation for everyone.
Wishing everyone a Happy New Year’s