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The Importance of Ongoing Monitoring and Adjustments in Investment and Financial Planning

monitoring financial planning

Investment planning is a crucial aspect of financial planning. However, it’s not a one-and-done process.

Here’s why.

The Goals of Investment Planning

Before delving into the importance of ongoing monitoring and adjustments, let’s briefly revisit the primary goals of investment planning:

Wealth accumulation: Building wealth over time to pursue financial goals like retirement, education, or purchasing a home.

Risk management: Balancing the risk and return of investments to align with your risk tolerance and financial objectives.

Diversification: Spreading investments across various asset classes to reduce risk and enhance potential returns.

Liquidity: Ensuring you have access to funds for emergencies or opportunities.

Tax efficiency: Minimizing tax liabilities on investment gains through strategic planning.

Legacy planning: Passing on wealth to future generations or charitable causes.

These goals are a foundation for your investment strategy but aren’t set in stone. They evolve due to changes in your circumstances, like marriage, the birth of children, or career advancements.

The role of ongoing monitoring

Here’s why ongoing monitoring is crucial:

Risk management: Risk management in investing refers to identifying, assessing, and mitigating potential risks associated with an investment. Risk management aims to balance the risk and return of investments to align with your risk tolerance and financial objectives.

As your life circumstances change, so may your risk tolerance. Regularly reviewing your investments ensures they align with your current risk tolerance and financial objectives.

Performance evaluation: Monitoring your investments provides insight into their performance relative to your goals and expectations.

Asset allocation: Asset allocation is a strategy that involves dividing your investment portfolio among different asset categories, like stocks, bonds, and cash. Asset allocation aims to balance risk and return by diversifying investments. Each asset category has its level of risk and return potential.

Over time, your portfolio’s asset allocation may drift away from your intended mix due to market fluctuations. Regular checks help you rebalance your portfolio, ensuring it remains diversified and aligned with your risk profile.

Tax efficiency: Tax efficiency of a portfolio refers to the efforts to minimize the impact of taxes on investment returns. It’s important because taxes can significantly reduce the overall returns on an investment portfolio.

By designing a tax-efficient portfolio, you may minimize your tax liability and increase your after-tax returns.
Tax-efficient strategies include investing in tax-advantaged accounts, like individual retirement accounts and 401(k) plans, and investing in tax-efficient investments, like index funds or exchange-traded funds that generate minimal taxable income and have low turnover rates.

Tax laws and regulations can change, impacting your investment strategy. You may optimize your tax efficiency by staying informed and making adjustments when necessary.

Benefits of ongoing monitoring

Diligent ongoing monitoring and adjustments offer numerous benefits:

Improved performance: Regularly reviewing and adjusting your investments may improve performance outcomes, increasing your chances of pursuing your financial goals.

Risk mitigation: Risk mitigation refers to identifying, assessing, and managing potential risks associated with an investment. The goal of risk mitigation is to minimize the impact of potential risks on investment outcomes.

Risk mitigation can involve diversifying investments across different asset classes, industries, and geographies and implementing other risk management strategies.

Alignment with goals: Periodic reviews help ensure your investment strategy aligns with your evolving financial goals and objectives.

Confidence: Knowing that you are actively managing your investments can provide confidence, especially during turbulent market periods.

Tax optimization: Staying informed about tax laws and adjusting your strategies accordingly can result in tax savings.

How to implement ongoing monitoring

Implementing ongoing monitoring and adjustments in your investment planning requires a systematic approach:

Set clear objectives: Clearly define your financial goals and risk tolerance. These objectives will serve as the basis for your investment strategy.

Regular check-ins: Schedule regular intervals with your financial advisor to review your investments. Quarterly or annual reviews are common.

Evaluate performance: Assess the performance of your investments against benchmarks and expectations.

Rebalance: Rebalancing is the process of realigning the weightings of a portfolio of assets. It involves periodically buying or selling assets in a portfolio to maintain an original desired level of asset allocation or risk. The goal of rebalancing is to minimize risk and keep the intended asset allocation of a portfolio.

Over time, the performance of different assets within a portfolio can cause the portfolio’s allocation to shift away from the original desired allocation. This can result in a portfolio overexposed to certain assets or sectors, increasing risk and reducing diversification.

By rebalancing, you can return your portfolio to its original allocation, reducing risk and ensuring it remains appropriately diversified.

Consult professionals: Consider working with a financial advisor who can provide expertise and guidance in managing your investments.

Final thoughts

Investment planning is an ongoing journey. The dynamic nature of financial markets and the evolution of your circumstances require regular monitoring and adjustments to ensure your investments align with your goals. Neglecting this crucial aspect of financial planning can lead to missed opportunities, increased risks, and inefficient tax strategies.

Embracing ongoing monitoring and adjustments may improve performance, risk mitigation, and confidence.

Your financial goals may change, but your commitment to actively managing your investments should remain constant.

Content in this material is for general information only and is not intended to provide specific advice or recommendations for any individual.

All investing involves risk, including loss of principal. No strategy ensures success or protects against loss.

Asset allocation does not ensure a profit or protect against a loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.

ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value (NAV). Upon redemption, the value of fund shares may be worth more or less than their original cost. ETFs carry additional risks such as not being diversified, possible trading halts, and index tracking errors.

LPL Financial does not offer tax advice.