Your Year-End Financial Statement: How to Review It During a Pandemic
Over the past two years, everyone has experienced some big life changes. For example, about 9.6 million Americans lost their jobs due to COVID-19. There was also a 24% increase in new business applications from 2019 to 2020. These are huge life changes brought about by the pandemic, which may have had a massive impact on your financial situation.
People are reconsidering how to prepare for the unexpected, how they want to earn a living, and how they can best save for retirement given the economic conditions of today. Whether you’ve lost a job, moved across the country, received an inheritance, or something else entirely, it’s crucial to think about how these changes will affect your financial goals and strategies.
However, it’s not just about logistical changes in your assets or life situation. A global pandemic has the power to change the way you prioritize everything, including your time and money. Analyzing your year-end financial statement is a perfect time to reflect on these priorities and assess how they’ve changed. Your goals—financial and personal—should be in alignment with your portfolio.
Here’s how to do a review of your year-end financial statement during a pandemic.
How to Analyze Your Year-End Financial Statement During COVID
No matter what your situation, it’s important to cover your bases and make sure you’ve got a clear picture of what your finances look like. So analyzing your year-end financial statement during the ongoing pandemic should include all of the regular steps—reviewing your goals and adjusting your asset allocation—but with a few special considerations to keep in mind.
You can break down this analysis into five steps:
Review your goals
Review your risk tolerance
Review your asset allocation
Review your individual holdings
Review other financial loose ends
Below is an overview of what each step entails.
1. Review Your Goals
How have your goals and priorities shifted in response to COVID-19? To properly review your year-end financial statement, it’s important to start with your goals.
Maybe you want to diversify your investments into nontraditional assets like real estate or precious metals to hedge against inflation or market volatility. Or perhaps you want to turn your side business into a full-time career. On the other hand, it’s possible that the pandemic caused you to rethink your priorities entirely and now you want to achieve early retirement.
Spend extra time this year thinking about what you’ve achieved so far and how the pandemic has changed your vision for the future. Without knowing how your goals have shifted (or remained the same), it’ll be difficult to complete the following steps when reviewing your year-end financial statement.
2. Review Your Risk Tolerance
The next step for your year-end financial statement is to review your risk tolerance. After the global turmoil of the pandemic and subsequent changing priorities, you may find that your risk tolerance has shifted one way or the other. Maybe you found that you really can’t stomach market volatility like you thought you could. Or perhaps you realize that if you want to meet your goals, you have to be willing to accept more risk.
Although we’re not financial advisors, we do caution you not to make important financial decisions based on emotions. More often than not, emotions are not a sound guide when it comes to investment decisions, and 66% of investors regret emotional or impulsive investment decisions because they ended up losing money in the long run.
While the pandemic may have taught you something about your true risk tolerance, you should always review your financial decisions and risk capacity with an experienced financial advisor. Only then can you be more sure that you’re not making important financial decisions purely based on emotions.
3. Review Your Asset Allocation
COVID-19 likely had some effects on how your investment allocation shifted over the past year or two. With ensuing market volatility, it’s extra important to spend time on this step while reviewing your year-end financial statement. Look closely at your portfolio. If your current allocations no longer align with your investment strategy (which may have changed based on changing goals), it’s time to rebalance.
For a simple example, maybe you decided the appropriate investment allocation for your time horizon and risk tolerance is 60% stocks and 40% bonds. However, if you and your financial advisor determined that allocation several years ago, it may no longer be relevant to your goals or today’s market conditions.
To align your asset allocation with your current goals and the state of the economy, you may need to rebalance. If you’re close to retirement and find that your allocation is too heavy in risky investments (or your investments aren’t producing the returns you need), rebalancing can get you back on track with the most optimal balance that’s appropriate for your time horizon.
4. Review Your Individual Holdings
It’s also important to look at individual holdings in addition to your asset allocation when reviewing your year-end financial statement. This means looking at each holding and analyzing how it’s performing on an individual level.
It’s important to consider your holdings’ performance based on more than just the past year. Consider how each holding has performed over the past several years, including aftermarket ups and downs. You should also research how these holdings are expected to perform in the future and take this into account when deciding what to sell.
Now is also a good time to think about any nontraditional assets you may want to invest in. A self-directed IRA allows you to further diversify your holdings by using retirement money to include alternative assets in your portfolio, such as real estate, precious metals, tax liens, private equity, hedge funds, and more.
5. Review Other Financial Loose Ends
Finally, your year-end financial statement review should culminate with reviewing any other financial loose ends. The pandemic forced everyone to take a good, hard look at their savings. Not everyone lost a job or dealt with unexpected expenses as a result of the pandemic, but many did. It’s times like these that remind us why an emergency savings fund is so important.
Make sure you have enough cash to cover three to six months’ worth of minimum expenses. Take into account any lifestyle changes. Six months of minimum expenses now might be different than it was at the beginning of the year due to inflation or other conditions.
Reconsider what you need in order to feel comfortable if an emergency were to happen. The longevity of these uncertain times may prompt you to add to your emergency cushion. Or, maybe you left a corporate job and started your own business, and your income now fluctuates. Perhaps you need a larger savings pool to make you comfortable with this new cash flow.
Finally, if you have a flexible spending account (FSA), any unused contributions will be lost at the end of the year. Either use it or lose it, because it won’t roll over. Now is also a good time to max out your health savings account (HSA) if you have a high deductible healthcare plan. This money is triple-tax-advantaged and can be used to pay for any qualified medical expenses. It also never expires, so you can let the money grow if you don’t need it right away.
How Chicago Trust Administration Services Can Help
As you analyze your year-end financial statement, take time to evaluate your goals and adjust your investment allocations for a more diverse portfolio. If any lesson has emerged over the past couple of years, it’s that security is more important than we think. Diversifying your portfolio is one way to build security, and having a self-directed IRA can help with that. With a self-directed IRA, you can invest in nontraditional assets and reap the tax benefits of traditional or Roth retirement accounts.
At Chicago Trust Administration Services, we administer self-directed IRAs for those who want to take advantage of this approach to planning for the future. We know we can’t plan for everything—the pandemic reminded us of that—but we can partner with you to make self-directed investing easier.
To see how we can help, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.