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Reading Between the Lines of 2013’s Big Stories – Carl Richards

When we see a story in the news repeatedly, we have a tendency to think it must be important. Thinking something is important often means we feel we should do something about it. This year, there were a lot of catchy headlines in the financial news, and most of them represented little more than noise. There were, however, a few important themes in 2013 that may affect your financial plan as we head into 2014.

1. The market was up sharply.

Up nearly 26 percent in 2013, the Dow Jones industrial average is on pace to have its best year since 1996, but what does that mean for you? If you have not already done so, it is probably time to rebalance your portfolio. Based on your plan, you will want to review how your portfolio is apportioned among stocks, bonds and cash. Even though stocks look really good right now, the last thing you want is to let the market drive your decision-making. You may think you are comfortable with the greater risk of having more invested in stocks right now, but what about six months from now?

If you do not have a portfolio built on a plan (for example: diversified, split among stocks, bonds, cash and so forth), then it is time to build one. Do not let the current excitement around stocks trick you into thinking you should go all in. It’s not safe even if “everyone else is doing it.” That’s something teenagers say right before they do something stupid.

Don’t be a teenager with your finances. Take the time to become clear about your goals and build a portfolio that will get you through both the ups and the downs that will hit the market.

2. Interest rates are still low, but …

It may seem as if interest rates will stay at historical lows forever, but don’t bet your house or your portfolio on it. Now is a good time to hold a lifeboat drill. Ask yourself: What will happen to your financial picture if rates go higher? Higher rates may mean fewer options, so now is the time to do what you can to protect yourself against a rise.

Do you have an adjustable-rate mortgage? Consider locking in your rate. Then, take a look at your portfolio. You want to make sure the portion of your portfolio that is meant to be “safe” (for example, bonds) is actually safe.

As an example, if you have bond mutual funds, make sure you understand what you actually own. Start by looking at the current average credit quality, maturity and duration. Remember that higher credit quality and shorter maturities equal less risk. The reason you own bonds is to provide safety and to allow the stock portion of your portfolio to work for you, so make sure they are actually as safe as you assume.

The last thing you want to do right now is buy a bond or a bond mutual fund that offers a higher yield at the expense of large principal loss if interest rates go up. However, do not be drawn into thinking you should move to cash and wait for interest rates to go higher. I know people who have been waiting for rates to go up for years. Yes, earning a ridiculously low 2 percent in a high-quality, intermediate-term bond does not sound exciting, but 2 percent is better than cash. So be safe, but avoid being stupid.

3. Housing markets improved.

After the bubble burst, it seemed as if housing might never recover. But with low interest rates and improvements in the economy, we have seen some positive movement in housing. What does an improved housing market mean for you?

If you have been waiting to sell or buy, now is a good time for a review. While your home’s value may not be at 2006 levels, it might have recovered enough to give you options. Run the numbers and see. You may find that 2014 is the year to exit your holding pattern if you have wanted to sell. And if you are thinking about buying, given where interest rates are, it may be worth looking at your options there.

Review your finances and know how much house you can really afford, so you can avoid surprises when you apply for a mortgage. And don’t let the fact that the housing market has recovered a bit trick you into buying more than you can afford. As we have learned, housing prices can and will go down.

While I’m a big fan of shutting off the noise and not reacting to headlines, there are times when we need to put the news in context. These three stories are great examples of the kind of news that we want to think through to understand how it might affect our financial decisions. Of course, you may end up doing nothing, but by taking the time to weigh how these big events fit in your overall financial plans, you will lessen the odds of future disappointment.

 

This commentary appeared December 30 on NYTimes.com.

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Carl Richards

The BAM ALLIANCE

Carl Richards is the creator of the weekly Sketch Guy column in The New York Times and is a columnist for Morningstar Advisor. Carl has also been featured in The Wall Street Journal, Financial Planning, Marketplace Money, The Leonard Lopate Show, Oprah.com and Forbes.com. His simple but meaningful sketches served as the foundation for his first book, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things with Money.”

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