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Assessing long-term goals (and the progress toward them)

If you haven’t done it already, it’s time for an annual review.
I’m not talking about the kind of annual review that most investors have. You go into the office of your financial advisor and spend an hour or so going over each investment and how it is doing. There is nothing wrong with that kind of meeting, but it is not what I am talking about.

I’m talking about a meeting in which you look at your long-term goals and how much closer you are to realizing them. A lot of investors don’t really see a need for this kind of meeting. If you keep up with your individual investments and they are doing well, then you must be doing well with the bigger picture. It just makes sense, unless you are one of the few who know one of the secrets of our trade.

The secret is that your investments can be doing well, even when you are getting no closer to your goals.

Doing well, but…

How can that be? How can I being doing poorly when my investments are doing well?

Let me explain. Your financial goals are realized when you have enough buying power to finance your goals. However, your investments are judged on how well the manager has handled your money. Investment results are commonly reported on a “time weighted” basis. That means they don’t take into consideration how much money you may have added or taken away from an investment over the period that they are reporting.

Adding and subtracting money to and from an investment can have a tremendous impact on your ability to meet a goal, but it has nothing to do with how well the manager has managed your money, so we take them out of the mix in order to evaluate a money manager.

Most investors are more interested in their “dollar weighted” return than their “time weighted” return, yet it is almost never discussed.

How did you get your results?

The other major factor impacting your ability to meet your goals is how you got your results.

We, as an industry, project future rates of return as if you will get the same rate every year. We may say that, in order to reach your goal of having enough money for college for little Joey, you must average 8% a year for the next 10 years. That’s easy to understand and seems to be a reasonable goal. But the assumption is that you will achieve 8% every year for the next 10 years.

In fact, you may never have a year where you make 8%, but you could still have an 8% average. The problem is that how you get that 8% can have a huge impact on whether you meet your goals or not.

For example, let’s say that you invested $100,000 in an investment two years ago and it has averaged 12.5% per year over those two years. That sounds pretty good on the surface, but how much money you have at the end of two years varies greatly based on how the manager got their return.

If the investment had actually made 12.5% each year, you would have ended up with $126,562.50 at the end of two years. If, on the other hand, the manager lost 25% the first year and was up 50% the second year, his average return would have still been 12.5 %. However, his portfolio would have only been worth $112,500, less than half the real return of the first scenario.

The first scenario puts you well on your way to reaching your long-term goal while the other may very well miss its mark. The point is that even if your managers or your mutual funds are doing well, you still may need to adjust your portfolio to give yourself a better chance of making your goals.

These first few years of the new century have played havoc on many of the long-term goals of investors and some of them don’t even know it yet because they have taken their eye off of the ball. Let your financial advisor keep up with the individual performances, but never lose sight of the what it takes to get to the finish line, and that is more about real dollars than it is about percentage returns.

I can promise you that the college of your choice is going to care much more about how many dollars you can send them than about how well your mutual funds did over the past few years.

So, revisit your financial plan this spring and make sure you are doing the right things to make your life a financial success.

Contact MBJ contributing columnist Scott Reed, CIMA, CWA, AIF, of Hilliard Lyons, member NYSE & SIPC, in Tupelo at mbj@msbusiness.com.


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