It’s Time For Your Annual Financial “Check-Up”

December and January are always the busiest financial months for me. I am reviewing the previous year, evaluating and adjusting my portfolio, and planning for the year ahead. I am also getting tax documents together and deciding whether I need to make any final moves before April 15.

But let’s talk this week about my December tasks.

1) Review the year’s performance and the current allocation.

During the year, certain sectors will outperform others. This will change the allocation of your portfolio. There are a number of tools that you can use to get a clear picture of your portfolio’s weightings, which will help you make necessary adjustments.

For example, this year the energy sector is the top-performing S&P 500 sector. If you began the year equally allocated among the sectors, you are probably ending the year over-allocated into the energy sector. The end of the year is the time to look at the current allocation, and potentially take profits and move them into under-allocated sectors. The year’s worst performing sectors, albeit still both in positive territory for the year, are consumer staples and utilities. So a shift of some energy profits into these sectors may be prudent.

I personally use Fidelity’s Analysis tool, which allows me to obtain a detailed look at my portfolio’s holdings. For example, this tool tells me that I am 55% invested in U.S. stocks, 18% invested in foreign stocks, and then the remainder is in bonds, cash, and options. The tool tells me that my portfolio resembles a growth portfolio, but over the next decade I will be increasingly transitioning it to a lower-volatility income portfolio.

2) Review short and long-term objectives.

As you head toward retirement, your investment objectives should change. Assuming your portfolio needs to sustain you through retirement, you should start shifting it to more conservative investments. Review your allocation and adjust accordingly.

But that also goes for other major life changes. My youngest son started college this year. I started a 529 plan for him at birth, and it was aggressively invested.

Because I now need that money over the next five years or so to pay for his education, I have shifted it to more conservative investments. In the event of a bear market, aggressive investments can decline by 50% or more. You can’t afford to take a hit like that for funds you will need over the short term.

But you also need to think about whether your investment options are too conservative. If you are young and have a lifetime of investing in front of you, focus on more aggressive investments that should give you better long-term performance.

If you have a young child that may go to college in 16 years, a modest contribution to a 529 plan can grow significantly to help offset those higher education costs. For my youngest son’s education, I invested in technology and health care mutual funds for the first few years of his life. Those initial investments grew more than 10-fold, which is a huge help in paying for college.

3) Determine changes that should be made in your portfolio and put those plans into action.

I caution people not to keep more than 2%-3% of their net worth in any individual position. If it’s an investment fund like a mutual fund or exchange traded fund (ETF), it’s fine to go beyond these recommendations because these funds are diversified. But having too much in a single stock is just too much risk.

Believe it or not, there was a time that Enron was viewed as a fantastic investment. There are plenty of tales of people who lost most of their net worth because they had it all in company stock.

Read This Story: From Enron to Omicron, How The Media Mislead Investors

A year ago, I had two individual positions that had grown to be above 5% of my net worth. I set a plan into motion to reduce that back to a more conservative number. I started selling short-term covered calls against these positions, and during the year one of them was called away.

Now, my allocation is more in line with the overall S&P 500, with no single position comprising more than 3% of my total portfolio. However, Fidelity identified three sectors in my portfolio that differ significantly from the overall S&P 500 makeup. Those deviations are:

  • Health Care +14%
  • Information Technology -8%
  • Consumer Discretionary -5%

I am overallocated in Health Care, which has been the case for my entire investment career, and underallocated in Information Technology and Consumer Discretionary. Again, as I approach retirement age, I probably need to lighten up on the Health Care sector.

4) Search your portfolio and your budget for money that is inefficiently allocated.

All of us have money that can become inefficiently allocated over time. Maybe it’s a $5,000 car loan with a 5% interest rate while at the same time $5,000 is parked in a no-interest savings account. There’s a potential guaranteed 5% return. Pay off the loans as long as you can do so and still maintain an emergency cash cushion in place.

A review revealed that I had let some cash build up in a non-interest bearing account. I transferred that amount to my Fidelity Brokerage account where it will at least generate some interest. It will earn me about $500 more this year than if I hadn’t moved it, while serving as my emergency cash fund.

Year end is also a good time to check your car and homeowner’s insurance to see if maybe you can get a better deal elsewhere.

It’s a lot more fun to do this kind of analysis after the nice year we had in the market. In any case, December is a great time for this annual check-up.

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