There are three components to an investment plan that every dividend investor must ensure is in place. In my opinion, before you make another move in your portfolio these aspects must be addressed. The risks of not doing them places you with too much risk and with too much risk comes emotional decisions which can lead to negative consequences.[ad#tdg-embedded]
The best way to address each component and to ensure you are covered is to ask yourself three questions. Let’s look at each question and the details, think about your next steps when you review your portfolio.
Question 1: Are You Saving as Much as You Can?
The best thing you can do to help have more money in the future, is to maximize the input. Simply put, that means saving as much as you possibly can as regularly as you can. This chart (source), shows the drastic difference various contributions to a retirement (or any savings plan) can have.
Action: Take a look at your current cash flow, see if there is opportunity to allocate more of your income to your savings account.
Question 2: Do You Really Understand Your Risk Profile?
Your risk profile determines what the ratio of assets should be in your portfolio. This is fundamental to your portfolio because if it is not correct, you will make stupid decisions that are based on emotion rather than sound investing knowledge.
Action: Head over to Index Fund Advisors (ifa.com) and complete the Investor Risk Profile. From there you will truly understand what your risk profile is.
Question 3: Are You Diversified?
The final question concerns the most important aspect of your portfolio – the asset allocation. If your asset allocation is done right and you have the right components in your asset allocation, you will be adequately diversified. The question you need to answer is: is your portfolio is adequately diversified.
The way to do that is to take a look at your portfolio. Do you have only equities? Do you have only fixed income? Are you in mutual funds or just stocks? If you are in only stocks, then how many do you have?
There are a number of ways to look at diversification, so the quickest thing to do is to learn more about asset allocation and what it take to build a good portfolio. You can start right here by searching through my blog, or head over to ITA Wealth Management Blog where there is lots of asset allocation coverage.
Action: Read more about asset allocation and diversification. Take a look at my Top 20 investment books post for the ones on asset allocation and read them.
Summary
As a dividend growth investor, these three question are crucial to ensuring you start to look at your savings plans and portfolio. Take the action steps now, answer the questions and make that portfolio as strong as you possibly can.
Nice post. I think item #2 can often be the most underrated as many investors may think they understand their risk profile only to realize down the road that they are not entirely comfortable with their current setup. This often happens to people who ‘chase yields’; it can come back and bit you in the ass if one’s portfolio doesn’t accurately reflect one’s risk tolerance.
Thanks for linking to the IFA website! The quiz is quite comprehensive.