Happy New Year! Hopefully you enjoyed some nice time over the holidays with friends and family. Turning over the calendar on a new year always feels great, minus that hangover!
The new year is an excuse to change how you are doing things to better your life. Many look to improve their career, body or finances when the calendar hits Jan 1st. If you are new to this site and looking to improve your finances, go ahead and start here.
Many readers however are already well positioned and have been building wealth over time already. Investors are hitting all new highs in terms of their net worth. The S&P closed out the year with a 20.49% gain. No wonder we saw record sales on “Cyber Monday”.
So, what are we all to do now? Whether you are new to investing or have a net worth in the millions everyone is starting to wonder are we nearing a top? I have questioned it for years at this point if I am being honest. What has helped me stay focused and not get caught up in the bubble talk is taking the following actions.
1.) Build A Solid Emergency Fund
An emergency fund will help you weather the storm if it ends up coming in 2018. Do not get over confident in your ability to invest when everything is going up! Ensure you leave some money on the sidelines that is accessible in case something bad happens.
2.) Figure Out Your Asset Allocation
Asset allocation is important to understand. Once you have accumulated a significant amount of assets you need to spread them around the table. Being well diversified but in only one asset class is not enough. Finding uncorrelated assets will help you ride out the ups and downs that inevitably will come.
3.) Do A Hypothetical Gut Check Today
It is important to do a net worth calculation at least once a year. If you have been putting this off, go ahead and do it today. Then based on the asset class you are invested in assume a very bad loss in line with what has happened in the past.
This means for stocks imagine a cut in half this year. For real estate look at what happened to prices post 2008. Could you handle this today? If not, you need to adjust now while you still have the opportunity.
4.) Turn Paper Profits into Tangible Rewards
The financial independence community is awesome at being super savers. They figure out ways to save and invest daily and this is great! Just remember to reward yourself along the way. The market has not had a down year for nine years.
Now might be the time to take some money off the table and upgrade some things in your life that you have been putting off. Investing for the future is important but don’t forget about your quality of life today as well. Risk assets are just that a risk so take some of the reward now if you have been putting off something in your life.
5.) Build Some Dry Powder
“Dry powder” is just another way of saying build up some extra cash. Stay invested with your current allocation but above your emergency fund let some cash build up instead of investing right away. No one knows what the market will do.
You must stay invested with most of your money but having some reserves in case things take a dive is a good feeling. Having some extra cash on the side gives me the confidence to continue to aggressively invest.
Once you have thought through these steps realize that you must stay invested. Time in the market is much better then timing the market. Only invest in what you feel comfortable holding onto forever. If it seems to good to be true it most likely is. Invest wisely in 2018 and continue to crush it on your path to financial independence.
Best of luck to you in pursuing your 2018 goals!
What Are Your Thoughts?
- What have you done to position yourself after this huge bull market run?
- How do you stay invested and continue to invest at high valuations?
- What was the largest “unrealized” loss you have experienced in one year?