How To

How to Rebuild Your Wealth Post-Recession

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Many economists say the recovery will be slow, but, overall, they agree that the worst of “the Great Recession” is now over.

And this is the time for smart consumers to reassess their portfolios.

Generally speaking, how long it will take you to bring your investments back to where they were pre-economic crash and how you should go about doing it depends on your age. It also depends on the kind of financial shape you were in before the recession and currently. Luckily, almost anyone can take straightforward and realistic steps to generate more wealth in the post-recession world.

If you want to get back ahead of the curve financially, consider the following tips.

Evaluate The Current State of Your Portfolio

Now is the perfect time to evaluate the overall makeup and performance of your investments. Chances are, the investments you held before the fall of 2008 (assuming you still hold them) are in a totally different place midway through 2010. If you are an active investor and picked your own stocks, some of them may have taken serious hits. At this point, it is your call whether to hope they will someday rebound or cut your losses.

If any of your investments have produced gains, cashing in now could provide some capital for better investments or other purposes discussed below. In any case, the first step of rebuilding your wealth post-recession is to conduct a thorough analysis of where your investment portfolio is today.

Re-balance Your Portfolio

(Casey Serin)

Whether you are an active or passive investor, the recession probably took your portfolio out of alignment with your chosen asset allocation. The way to correct this problem is by re-balancing.

The simple act of stocks performing better than bonds (for example) will increase how much of your portfolio consists of the better performers. While this might sound desirable, it actually isn’t.

As Vanguard founder John Bogle told the Wall Street Journal, asset allocation is critical to long-term investment performance. Once you’ve established an asset allocation that works best for you based on your investment horizon and risk tolerance, the fact that one category is temporarily doing better than the others is no reason to let that category dominate from now on.

There are two ways to deal with re-balancing. The first is to just do it once or twice a year. That can be time-consuming and few investors would find particularly enjoyable.

The other way is to automate: invest in life-cycle funds (also known as target date funds) which invest on an asset allocation based on your age and are automatically rebalanced for you.

Grow Your Portfolio

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With winners kept or cashed in, losers weeded out and the portfolio rebalanced, it is time to grow your investment returns. If you are young and will not need your investment returns for many years to come, you can place bets in the market with little worry of temporary drops. Assuming you have some extra capital at your disposal, now is the time to beef up your current investments (or select new ones in line with your asset allocation) and give them a chance to grow.

Ways to obtain more investment capital include:

* Reducing expenses

* Reallocating capital from current poor performers into better investments

* Repaying debt and then using that same money to invest (more on that below.)

Aggressively Repay Outstanding Debts

(SqueakyMarmot)

If you have a lot of debt, consider repaying some or all of it before pursuing stock market opportunities. Getting back (or closer) to free and clear will put you in an infinitely better position both now and whenever the next financial meltdown strikes. It also enables you to later invest with full focus and zero regret about what you “should” be doing with the money instead.

To get started, rank your debts from highest amount owed to lowest amount owed, and also in order of priority. (Credit card debt, for example, would outweigh a student loan, which likely has lower interest that is also tax-deductible.)

Then, work out a payment schedule that includes paying more than the required minimum and a firm date for full repayment.

Mint.com’s new Goals feature can help you work out a plan for repaying your debts and track your progress along the way.

Ask for a Raise at Work

(archie4oz)

Now that employers are beginning to feel more optimistic about their future, it may be the perfect time for you to ask for a raise. The key is to frame your request in terms of benefits to the company rather than your own desire for more money. In the days and weeks leading up to your proposal, spend some time putting together evidence of how your work has helped the company’s bottom line.

If a project you ran led to a measurable increase in sales, prove it. If you somehow lowered costs, prove it. Then, demonstrate to the boss how you are adding value and could take on even more responsibility at the company.

To add credibility to the proposal, search for data on the types of salaries that comparable employees are earning, either in your firm or elsewhere. This would help your request look more like a business proposal and less like a shameless plea for higher pay.