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Particularly during the early weeks of a new year, many clients ask “how did I do last year?”
What they really mean is: what were their portfolio returns for the past calendar year? Sure, investment returns are important, but not the most important input within your financial plan. What are the important questions you really should be asking?
The Right Investment Questions to Be Asking
1. How much did you save?
Over time, the most critical determinants of financial success are how much you save and how well you stay invested. If your financial plan assumes that you will save $30,000 per year and you actually are saving only $10,000, this will obviously impact your long-run financial outcomes. Likewise, If you get scared out of the market when bad news appears, your behavior will also impact long-term results.
It’s not unusual in periods of above average investment returns to see clients save less than planned, assuming the returns will make up the difference. Unfortunately, what you might intend to be a one year savings deficit can easily become a multi-year habit. Your long-term financial behavior is much more important than short-term investment returns.
2. Did you overreact to the market?
How much you save and how well you behave are the cornerstones of returns. Returns alone won’t overcome a chronic savings deficit or poor investment behavior.
Your investment portfolio doesn’t care why you didn’t save or why you jumped out of the market, but these actions will reflect in your portfolio value over time. The reasons you did or didn’t do something are just your own justification, nothing more.
When you commit to the financial planning process, you are acknowledging that long-term investment returns will be driven mostly by variables that you control, (savings and behavior). The ups and downs of the stock market are outside your control, but that’s part of the package. The economy and politics fall into the same category.
3. Are you on track to reasonably meet your important financial goals?
It’s important to remember that you are saving and investing for some specific purpose in the future. Investment returns, good or not so good, for shorter time frames like a single year are of minor importance in the grand scheme of things.
We sometimes see clients who detail specific investment returns that they “need.” As we outlined earlier, over the long-term, returns originate from how much you save and then how well you stay with your investment plan.
As difficult as it may be to accept, the financial universe doesn’t reorder itself just because you “need” a particular percentage return from your investments.
If you “need” an abnormally high return from your portfolio, this usually signifies that you haven’t saved enough along the way.
When in doubt, remember the right questions to ask your financial advisor. Everything else is just noise. Start there.
Related: Less Distraction, More Progress: Align Your Financial Goals for the New Year