Tuesday, July 23, 2013

Your IRA or 401k and how escaping reality is just more fun!!!

A few days ago was an anniversary of our marriage.  My husband got me a very beautify ring.  And I got him, what I though was a very thoughtful gift, the game of Shogi (Japanese Chess) and a book with details on the game.  He looked at the game and said he'll think about the value of learning a new set of rules and symbols and suggested to try and play regular chess first.  My reply was "We both played chess before!  What's the challenge?!"

I was disappointed, I wanted us to learn a new hobby that would replace our current pass time of watching TV series and going to the movies.  Fast forward a few days, the box with Shogi is now carefully placed out of sight and we are back to watching True Blood, Dexter, Orange is the New Black, and the Walking Dead.  This might be because the default for de-stressing is to escape reality by watching something entertaining on TV.  Another, component is the routine or inertia of what we have been doing.  Change is usually hard if not impossible for most people.

This leads me to believe that many private investors who set their investment accounts to a specific set of funds never look back because they are in the same state of mind as our state of mind when it comes to spending evenings by watching TV.  While not getting into the game of Shogi will not effect our immediate retirement plans, I think we will miss out on learning something new and complex, which they say is good for brain exercise and overall well being.  What the investors are missing by not revisiting their retirement portfolio, are the changes in the market that directly effect their ability to maximize the return of their invested money. 

Many people I speak with about their IRAs or 401ks note to me that their balances seem to be the same as they were a few years ago.  If I left my IRA balanced the same way that it was balanced a few years ago I would be in a loss. Because a few years ago bonds and CDs were stronger than most stocks while now most bond saturated portfolios are flat or in the negative. 

In order for an investment portfolio to do well it is key to introduce new information in the management and review your investments regularly.  It is also key not to become complacent.  As seen in commercials, where a couple is realizing their 401K has disappeared and they don't know why, it's a valuable skill to break up the routine. 

To maximize your return, instead of setting the portfolio and forgetting it, YOU MUST:
  1. review it quarterly or more frequently
  2. make sure it is returning as much as the Dow Jones (DIA), NASDAQ(QQQ), S&P 500 (SPY), or another index(es) that you chose for your investment plan
  3. make certain you are maximizing your tax savings by allocating the maximum to this tax deferred investment account
  4. review your diversification (do not have more then 5 or at most 10) to be certain you allocate the higher percentages to sectors that are positioned to do well in the next quarter
  5. trade!  Yes, you can sell positions to reinvest the proceeds in what you perceive will be a stronger sector.  Remember your gains in this account are not taxable* (if you comply with IRS rules)