What To Do Now? Questions to Ask Your Financial Advisor

Is your investment strategy on track in early 2010? Investors experienced a bumpy ride in 2009 when the stock market plunged during the first nine weeks and then rose sharply by 65% to close the year with one of the strongest surges in recent history.
Still in 2009 “most participants in company retirement plans stayed the course,” says Pam Hess, director of retirement research for Hewitt Associates, a human resources consulting firm. Participation rates remained unchanged and contribution rates dipped only slightly in 401(k) plans.

However, the volatility of the market in the past two years and the passage of time, it’s worthwhile to meet your financial adviser to see if your investment strategy now need readjusting and if you are on track to meet your long-term goals, such as funding a child’s education or providing for a secure retirement for yourself.

It will be important to ask your adviser whether a more conservative investment allocation will still allow you to meet your long-term goals. For example, in the past, a portfolio of bonds and/or money market funds has tended not to keep pace with inflation over the long run. If a year or more has elapsed since you last set up—or last adjusted—your investment mix, you may need to rebalance your portfolio. To help you, we came up with eight questions for you to explore:

1. How has your financial situation changed?

Re-examine your investment goals, time horizon (that is, when you need to begin spending the money), risk tolerance, and financial situation. Have your objectives or circumstances changed?

2. Have your time horizons changed?

Most of us have multiple time horizons. For example, a 32-year-old woman who is saving for a down payment on a home in three years would be investing a portion of her money with a three-year time horizon, despite the fact that her retirement is 33 years away. Given the short time frame, it would be prudent for her to invest the assets for the down payment more conservatively than the retirement assets because there is little time to make up any losses.

3. Have you had any changes in your personal life that can affect your financial situation?
Have you changed jobs, been laid off, or decided to take a buyout offer or early retirement? Did you get married, have a child or become a grandparent? Has there been a divorce, or will your son or daughter be needing money soon for college tuition and expenses? Do your grown children need temporary financial assistance? Are you now helping financially support a parent or parents? If so, you may need to adjust your investment mix to provide for these changes.

4. Has your tolerance or risk changed?
Risk tolerance is often described as your ability and willingness to lose some or all of your original investment in exchange for greater potential returns. An aggressive investor, or one with a high risk tolerance, is more likely to risk losing money in order to get better results. A conservative investor, or one with a low risk tolerance, tends to favor investments that will preserve the original investment. During the recent down market, many investors found that they had moved from being an aggressive investor to a conservative investor.

5. What if because of the market decline, you haven’t accumulated enough for retirement?
Talk to your financial adviser about a number of possible strategies to help build up your assets before or during retirement:

  • Delay retirement a few years. If you could use a few more years to invest, it may be worth thinking about staying in your current job longer.
  • Work part-time in retirement. Bringing in extra income may keep you from using up your retirement savings too early.
  • Reduce your spending. It may be obvious, but by cutting expenses, you can help avoid outliving your investments.
  • Contribute as much as possible to your retirement plan, such a 401(k) or 403(b). If you are 50 or older, you may be able to make catch-up contributions that set aside an additional $5,500 for a total of $22,000 for 2010. If possible, try to to borrow or make a large withdrawal from your retirement plan

6. How do you readjust your portfolio if your investment mix is out of sync with your preferred asset allocation?
Investment portfolios can shift over time without our realizing what happened. For example, if you have set up at 60/40% stock/bond investment, and haven’t changed it in the past two years, you may need to rebalance your portfolio since your equity-oriented mutual funds may have fallen in price more than your bond funds during that period. If you want to maintain your 60/40% mix, you would have to sell some of your bond funds and invest the proceeds in stock funds.

7. Are there any tax implications for transactions you made in 2009?
Did you sell a mutual fund in December outside a retirement plan, hoping you could take a loss on your 2009 tax return? If you want to buy that same fund in 2010, keep in mind you must wait for more than 30 days. Otherwise, you violate the “wash sale” rule and you will not get the benefit of the loss in 2009. Talk to your tax adviser about this and other tax issues.

8. Should you consider converting your traditional IRA into a Roth IRA?
Starting this year, anyone—regardless of income, can convert a traditional IRA to a Roth IRA. In the past, people who adjusted gross income was more than $100,000 were unable to take advantage of this tax strategy. If you decide to convert, you will have to pay income taxes on the amount converted to a Roth IRA, excluding the amount of any after-tax contributions you may have made.
For conversions in 2010 only, Congress has approved a special rule allowing you to treat half of the income from the conversion as received in 2011 and the other half in 2012. But future withdrawals from a Roth IRA that include earnings are free from federal income tax after you’ve had the account for at least five years and reached the age of 59 ½.