“Am I investing the right way for my situation?” It’s a source of anxiety or confusion for many investors. How do you know? You diligently contribute—and choose mutual funds—for your 401(k) or IRA. You probably also have a brokerage account where you put some extra money into a mutual fund. But are you on track to hit your goals?
Whether you’re a seasoned investor trying to maximize every investment dollar, or a beginner who just wants to retire one day, you need to take the time to understand how your investments are doing, and if they are working enough for you. Here is a simple three-step check-up plan.
|1.||Focus on your goals.|
What are the goals for your investments? Your reasons for investing—retirement, or a child’s education, for instance—will dictate much of your investment strategy. Other related considerations include the length of time you plan to stay invested (time horizon), along with your emotional tolerance for market volatility, and your financial situation or capacity to absorb losses.
But how do you know if you are on the right track?
Let’s start with saving for college. Say you envision sending your newborn to an in-state public school and plan to cover 50% of the expenses with your savings (with the remaining 50% to be covered by a combination of scholarships, grants, and financial aid). According to the College Cost Calculator from the College Board, the total cost would be about $222,466, for which you will pay $111,233 over the course of four years.
Using Fidelity’s college savings calculator, we estimate you would need to save about $287 per month over 18 years, assuming a 6% annual rate of return. Saving less per month would require a longer period of time over which to save—or a higher rate of return, which you can’t always count on.
What about retirement savings? For a 25-year-old aiming to retire at age 67, Fidelity’s savings factor would suggest aiming to have saved 1x (one times) your salary by age 30. By the time retirement hits, we estimate you should have amassed 10x your salary.1
Are you on track to meet your retirement goals? Get your retirement score on Fidelity.com. Or even better, do a more detailed analysis of your goals—including education—in Fidelity’s Planning & Guidance Center (login may be required). If you are not on track to achieve your goals, you can catch up by saving more or postponing your planned retirement date—and you may also need to adjust your asset mix.
- Read Viewpoints: “How much do I need to save for retirement?” on Fidelity.com.
|2.||Check your asset mix.|
A key to success is creating an asset mix that aligns with your goals. But market moves can shift that allocation, inadvertently shifting your investment mix out of alignment with your goals, time horizon, financial situation, or emotional tolerance for portfolio volatility. That’s because your investment mix may become more or less risky than you intended due to movements of the stock and bond markets. Your stock investments may become over- or underweighted relative to your other investments, which can shift the level of risk and return you may be trying to target.
Check your asset mix at least once per year to help keep it on track with your objectives. If your life or goals change significantly—or, after big moves in the market—review your investments and rebalance if necessary. If your investment mix has drifted by 10% or more, you may want to consider rebalancing.
One way to get back into balance is to direct more of your contributions into the investments that have lagged behind and reduce purchases of investments that have appreciated. It may sound counterintuitive, but buying low and selling high is one of the secrets to successful investing. Unfortunately, many individual investors do the exact opposite. Rebalancing at least annually may help you avoid this pitfall and follow the right habit. Note that periodic investment plans do not guarantee a profit or protect against a loss in a declining market.
- Read Viewpoints: “Six habits of successful investors” on Fidelity.com.
|3.||Benchmark individual investments.|
You should also evaluate your investments to ensure that they are still an essential part of your plan.
Evaluate the performance of stocks, bonds, mutual funds, or ETFs by comparing them to appropriate benchmarks. The easiest way to find the appropriate benchmark index is on the stock, bond, fund, or ETF research page on Fidelity.com.
An index is a group of investments that represent a slice of the market. For example, the S&P 500® tracks the performance of 500 of the largest companies in the United States and is generally a barometer for all big companies or even the entire U.S. stock market. It is often the preferred benchmark for funds that invest in large-company stocks—companies that are worth more than $5 billion.
But, the S&P 500® would not be an appropriate comparison for a fund that invests in bonds, for instance. If you’re using benchmarks to evaluate the performance of your investments, make sure you’re comparing apples to apples.
Analyze how your investments are performing versus investments in the same category—often called performance versus peers.
Morningstar categorizes mutual funds based on the companies they buy; for instance, large or small companies, growth or value, or a blend. Looking at the performance of similar mutual funds over a given time frame may give you a deeper level of insight than looking only at an index. During times of market turbulence, it can help to analyze how much the performance of your fund fluctuates compared to similarly categorized funds.
Another reason to look at similar funds: Not all types of investments appreciate at the same time. Different types of companies perform relatively better or worse at different times throughout the business cycle (recurring phases of economic growth and contraction). A broad index may capture all types of companies while a mutual fund may concentrate on a more narrow range of investments—for instance, only small-cap value stocks. Looking at mutual funds that have similar investing styles may give you a view into how well your mutual fund is doing the specific job that you hired it for.
Ask yourself these questions:
- Why did you buy this investment? What role is it supposed to play in your plan? Different types of investments play different roles in your portfolio and may provide varying patterns of risk and return. For instance, does it give you more exposure to big companies or small companies, or does it target a particular style of investing, like value or growth?
- What is impacting the performance of your investment? How does it compare to others like it? For instance, what is going on in the world, in the stock market, or in the industry, that affects returns? Keep in mind that different types of investments do well at different times.
Look at how your fund has performed relative to the benchmark index—as well as similar funds. Recent performance shouldn’t be your only metric—consider annual performance in the context of fees as well. Risk is another important dimension—it’s important to evaluate the historical risk (variability of returns) associated with a fund’s historical return. Risk-adjusted returns can be a useful metric when comparing funds with different levels of risk and/or return.
- Read Viewpoints: “Investing tips for young people” and “What you need to know about fund fees” on Fidelity.com.
Get help if needed.
Don’t get discouraged if it seems like a lot of work—target date funds and managed accounts are two options to consider if you don’t have the skill, will, and time to manage your retirement investments.
- Read Viewpoints: “Quick-start guide to your 401(k)” on Fidelity.com.
Saving and investing for a distant goal takes perseverance and consistency. Whether you’re an ace at saving and investing, or may need to do some extra work to catch up, there is time to improve—but you need to know where you stand in relation to your goals to know what you need to do. Seeing your hard work paying off through the years as you get closer to achieving your objectives can keep you motivated and on track.
- Want more? Subscribe to Viewpoints for weekly financial insights.
- Visit the Planning & Guidance Center on Fidelity.com (login may be required) to create an investment plan and monitor you progress.
- Find out more: managed accounts.
- Investigate target date funds from Fidelity: Fidelity Freedom® Funds.
- Explore Fidelity GoSM for professional online investment management.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
S&P 500 Index is a market capitalization–weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent U.S. equity performance.
Russell 2000 Index is a market capitalization–weighted index designed to measure the performance of the small-cap segment of the U.S. equity market. It includes approximately 2,000 of the smallest securities in the Russell 3000 Index.
Russell Midcap Value Index is a market capitalization–weighted index designed to measure the performance of the mid-cap value segment of the U.S. equity market. It includes those Russell Midcap® Index companies with lower price-to-book ratios and lower forecasted growth values.
Russell 3000 Growth Index is a market capitalization–weighted index designed to measure the performance of the broad growth segment of the U.S. equity market. It includes those Russell 3000 Index companies with higher price-to-book ratios and higher forecasted growth rates.
Barclays® U.S. Aggregate Bond Index is a broad-based, market value–weighted benchmark that measures the performance of the investment-grade, U.S. dollar–denominated, fixed-rate taxable bond market. Sectors in the index include Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS.
Barclays® 3+ Year Non-AMT Municipal Bond Index is a market value–weighted index of investment-grade fixed-rate Non-Alternative Minimum Tax (AMT) municipal bonds with maturities of three years or more.
BofA Merrill Lynch U.S. High Yield Master II Index tracks the performance of below-investment-grade, but not in default, U.S. dollar-denominated corporate bonds publicly issued in the U.S. market, and includes issues with a credit rating of BBB or below, as rated by Moody’s and S&P.
MSCI ACWI-ex U.S.® or the All Country World Index (excluding U.S.) measures the performance of stocks in emerging and developed markets outside the U.S.
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