When Markets Get RockySubmitted by LWM | Linden Wealth Management LLC on January 4th, 2019
Six-Step Portfolio Review
When markets get rocky, it's particularly important to shift the focus back on to the things within your control. It's a time to reexamine what's in your portfolio, why you own it, and if the level of risk is appropriate.
Take this six-step portfolio review by yourself or with your advisor. See how your portfolio measures up. Rebuild confidence that you are doing everything within your control to remain on track and solve your long-term financial goals:
Step 1: Conduct a "wellness" check
Does your portfolio, combined with your saving rate, put you on track to reach your goals? For younger investors still accumulating assets, are you saving enough annually? A good baseline is 15%. Wealthier investors who earn more should aim for 20% or higher. Social Security won't be enough.
Step 2: Assess your asset allocation
What's in your portfolio? Is it appropriate and can it generate enough long-term returns to satisfy your goals? If you're retired and in drawdown mode, do you have enough cash and high-quality bonds so that a drop in equities wouldn't permanently impair your portfolio's sustainability? Those approaching retirement within ten years should consider some de-risking by shifting money to bonds and cash. Be mindful of tax consequences.
Step 3: Check the adequacy of liquid reserves
Hold some cash and liquid reserves for a rainy day. If you're working, have at least 3-6 months worth of expenses in a savings or checking account. Wealthier individuals with higher expenses should hold more. Retirees should keep six months to 2 years worth of portfolio withdrawals in cash investments. Those more equity-heavy can use rebalancing to top up their liquid reserves. Cash investments can earn as much as 2%.
Step 4: Assess sub-allocations and troubleshoot other portfolio-level risk factors
At one point all stocks seemed to move in lockstep. That's no longer the case. Check your portfolio's style-box to make sure it's not leaning disproportionately to growth stocks. Use a U.S. market index fund as your guide with roughly 24% in each large-cap square, 6% in each mid-cap square, and 3% in each small-cap square. Avoid big inadvertent bets. On the bond side, ensure your portfolio will deliver ballast when you need it. Bonds should be conservative, especially if you hold more equities.
Step 5: Review holdings
After checking your allocations and sub-allocations, take a closer look at individual holdings. Avoid concentrations of risk, minimize fund expenses, and make sure performance is in line with the asset class and fund benchmarks. Look out for any management or strategy changes.
Step 6. Attend to tax matters
Taxes can erode and eat away at your returns. Make sure you're taking full advantage of any tax-deferred investment vehicles at your disposal. Update your contribution levels. Harvest tax losses to offset capital gains and lower taxable income. Take required mandatory distributions before year end and consider using it as a qualified charitable distribution.
As a fiduciary and fee-only advisor, I don't make money by selling financial products. I'm free to recommend the strategies and investments that make sense for couples and individuals, based on a clear understanding of where you're headed in life.
If an open conversation of this kind will be helpful to you, request an appointment now. Feel free to call out any specific questions you'd like me to address.
*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2018 Advisor Websites.