How To Build (Or Rebuild) Wealth
Kiplinger's Personal Finance|May 2021
Our 11-part plan will help you establish a solid financial foundation or take stock of your progress.

As distressing as the past year has been, most Americans’ balance sheets have survived more or less intact. But even if your finances are still healthy, take note: Amid the ups and downs and twists and turns of the economy and stock and bond markets—plus all the other forces that buffeted your finances—there are lessons that could help you make better decisions the next time calamity strikes.

Building wealth helps you reach your goals as well as survive setbacks—stock market cor­ rections and bear markets, recessions, health emergencies, and job loss. Your wealth­building refresher course should include an honest assess­ment of whether you allowed emotional, psycho­ logical or other behavioral miscues to nudge you to make money moves you may now regret, such as exiting the stock market near the bear­ market low and missing the rebound. “Our brains are not wired to easily make rational decisions when our fear is through the roof,” says Michelle Spaziani, a certified financial planner and founder of Summit Behavioral Wealth. To avoid making the same mistakes next time, she says, determine the triggers that can push you to upend your plan. The good news: Mistakes are learning opportunities that can put you on track to accumulate even more wealth.

STICK WITH STOCKS

Bailing out of the stock market might have seemed like a good idea last spring, when the economy was in pandemic lockdown, major cities re­ sembled ghost towns and job losses were piling up. Stocks were heading for the first bear market in more than a decade. But selling turned out to be a terrible idea—especially for in­ vestors who never got back into the market. They missed out on the fast­ est re covery ever and a 75% rally from the low point for the S&P 500.

A costly retreat to the sidelines only reinforces the mantra that trying to time the market is not a winning strategy. The lightning­fast, 16­session COVID­19 stock bust and the boom that followed offer a reminder that timing an exit from the market is just the first of a two­part decision. The second, more important part is decid­ ing when to get back in.

Often, that means missing big gains, such as the S&P 500’s 9.3% spike on March 13, 2020, and a 9.4% surge 11 days later (the 9th­ and 10th­ best daily jumps ever). Missing big up days can crimp returns big­time. An investor who missed the best 10 days for the S&P 500 in the 20 years ending in 2019 would have earned an annualized 2.4% return and turned a $10,000 in­ vestment into $16,180, compared with a buy­and­holder’s 6.1% gain and ac­ count balance of $32,241, according to J.P. Morgan Asset Management. It’s true that dodging the worst 10 days would have produced 10.1% an­ nualized, turning $10,000 into more than $68,000. But it is unreasonable— if not impossible—to believe that any­ one is capable of consistently divining market highs and lows.

The takeaway: “You can’t control market moves, just your own,” says Lindsey Bell, chief investment strate­ gist at Ally Invest.

SPREAD THE WEALTH AROUND

Another lesson for investors from the pandemic is that the market is unpredictable. And that highlights the importance of having a diversified portfolio. Diversification won’t pro­tect you from losses, especially over the short term. But it should smooth out your ride in the long run. Spread­ ing your assets among a number of investments will keep a downturn in one of them from tanking your whole portfolio. The counter intuitive rule of thumb is that if part of your portfolio isn’t underperforming at any given moment, then you’re not diversified enough.

Start with an asset­allocation plan. Set targets for how much to hold in stocks, bonds and cash or other assets appropriate for the length of time you have to invest and your risk toler­ ance, says Eric Walters, a CFP in Greenwood Village, Colo. A portfolio for a moderate­risk investor with a 10­year time horizon might hold 40% in bonds, 35% in U.S. stocks, 15% in foreign stocks and 10% in cash; an aggressive investor with a longer time frame might put 60% in U.S. stocks, 25% in foreign stocks and 15% in bonds.

Having allocation targets will force you to be disciplined about rebalanc­ ing your portfolio by periodically skimming off some of your winnings and deploying the profits into lagging assets, which basically ensures that you’ll sell high and buy low. Rebalance once a year, or whenever your alloca­ tion strays 10 percentage points be­ yond its target. “Whatever your trig­ ger, it doesn’t matter much,” says Paul Winter, a certified financial planner in Salt Lake City, Utah. “It matters more that you just do it.”

Even with stocks waffling lately, most investors will need to sell stocks and buy bonds to rebalance these days. Which bonds you buy will de­ pend on the role you expect them to play in your portfolio—say, a foil to stocks, a safe place for cash you need soon, a source of income or an infla­ tion hedge. A high­grade bond fund such as FIDELITY INVESTMENT GRADE BOND (SYMBOL FBNDX) can fortify your port­ folio against a stock market downturn, for example. A short­term fund, such as ISHARES ULTRA SHORT-TERM BOND (ICHS), can preserve capital.

With rising inflation worries, a 5% to 10% allocation (taken evenly from your stock and bond slices) to an inflation hedge might be in order. Treasury inflation-protected securities, which you can buy directly from Uncle Sam (www.treasurydirect.gov), are one option. Commodities, another traditional inflation hedge, may be timely, says Winter. ABERDEEN STANDARD BLOOMBERG ALL COMMODITY LONGER DATED STRATEGY K-1 FREE ETF (BCD) tracks the Bloomberg Commodity index, and as its name suggests, there’s no K-1 tax form to tangle your tax return. (For more on commodities, see “Street Smart,” on page 36.)

SAVE MORE FOR RETIREMENT

A well-funded retirement plan will provide peace of mind and, ideally, provide something left over for your children so they can start building wealth on their own.

But even disciplined savers were thrown off their game by the pandemic. Layoffs, furloughs and reduced hours forced millions of workers to reduce contributions to their 401(k)s and other savings accounts or take withdrawals to pay the bills. Others who managed to keep their jobs tapped their savings to help family members. More than one-fourth of parents took money out of their retirement plans or investment accounts in 2020 to help pay their children’s rent or other living expenses, according to a survey by the National Association of Personal Financial Advisors.

To get your savings back on track, start by repairing any damage inflicted by the pandemic. If you took a coronavirus-related hardship with-drawal from your 401(k) or other tax-advantaged retirement plan, the Coronavirus Aid, Relief, and Economic Security (CARES) Act gives you up to three years to repay the funds you withdrew, as long as your employer allows it. The repayment will be treated as a tax-free rollover. (If you repay the distribution after you’ve paid taxes on it, you can file an amended return and get a refund.) The sooner you repay the money, the more time it will have to compound and grow.

Similarly, if you took a loan from your 401(k) plan last year, resolve to repay it as soon as your finances allow. While the CARES Act gives you six years instead of five to repay a 401(k) loan, replacing the funds you borrowed as soon as possible will pay off over the long term.

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