Tax time is an ideal time to declutter your portfolio
By Kerry Hannon for Next Avenue
Where I live in Washington, D.C., the pink magnolia trees are blooming, and the daffodils are intensely yellow and screaming springtime — just in time for the first day of spring, Sunday March 20.
It’s time to get out in the backyard to tackle garden cleanup… right after I finish my taxes this weekend. Which brings me to a more prosaic chore: Spring-cleaning is also time to clear out the clutter in my financial life, particularly my investments. And I think you should, too. (I’ll tell you how shortly.)
When I’m doing spring-cleaning for my portfolio, I check to see if I need to consolidate and sell extraneous and underperforming funds and stocks. I also do a goals checkup and tune-up to rebalance my investments, so I have the right asset allocation of stocks to bonds to provide the oomph needed to last a potentially long life.
This year’s stock market nuttiness has made me keenly aware of the potential risks that come along with my personal equity-heavy strategy, though. In fact, the latest Wells Fargo/Gallup Investor and Retirement Optimism Index fell to the lowest it’s been in nearly two years. The primary factor: reduced optimism in the stock market. The percentage of investors optimistic about the 12-month market outlook fell from 45 percent in the last quarter of 2015 to 32 percent. “Investors have had to weather significant market volatility,” according to Joe Ready, director of Wells Fargo Institutional Retirement and Trust.
To be honest, my annual spring financial cleanup isn’t something I eagerly look forward to, but with all my tax-prep papers out, it’s an ideal time of year to give everything a once over.
8 tips to spring clean your investments
My eight suggestions for your spring cleanup:
- Rebalance your retirement account. This once-a-year technique generally keeps your portfolio from becoming far more aggressive or conservative than you envisioned. Rebalancing means you review your retirement account’s stocks vs. bonds tilt, see if it matches what you want, and move money around if it doesn’t. Financial advisers like Cathy Curtis, a Certified Financial Planner with Curtis Financial Planning in Oakland, Calif., generally suggest rebalancing whenever your portfolio gets more than 10 to 15 percent away from your original asset allocation.
Workplace 401(k) and similar retirement savings plans increasingly allow you to set parameters for automatic rebalancing. Otherwise, consider using a roboadviser — an online money manager such as Wealthfront or Betterment.
- Scrutinize how your entire portfolio is divvied up between stocks, bonds, and cash investments. This simple asset allocation is the core of your investments’ potential payback, and, of course, risk. It’s important to balance your need for the potential upside of future returns that you might get from stocks and mutual funds or ETFs that hold them with your tolerance for risk, says Curtis.
Portfolios with a greater percentage of stocks have more risk and therefore have a greater fluctuation in value over the short-term, as we saw in the depressing days of January. But they also provide a higher return over time. Over the long run, U.S. stocks have produced gains of close to 7 percentage points a year above inflation. That said, it’s probably more realistic today to expect stocks to return around 4 points a year above inflation.
So the right mix is very important to reaching long-term goals. One rule for the percentage of your portfolio that should be in stocks: 100 minus your age. In other words, if you’re 55, you’d have 45 percent in stocks. But given the outlook for longer lifespans, I tweak that rule slightly: I use 110 minus my age. For many retirees, a 50 percent stock allocation can make sense to counteract inflation and avoid outliving your money.
- Consolidate your accounts. It’s hard enough to get a grip on your investments, but if you have a slew of different statements arriving periodically that you probably don’t open, it’s even more of a nuisance. Check to see whether you have more than one fund with the same investment objective. If you do, merge them.
- Consider investing in a target-date fund. To simplify your investments, go with the set-it-and-forget-it strategy. A target-date fund can be a smart way to save for retirement if you don’t want to choose and monitor your investments; many people use them for their 401(k)s. A target-date fund automatically adjusts the balance of your fixed-income (bond) investments and stocks based on your age.
Select your target-date fund based on the year you expect to retire. The biggest target-date fund families are Fidelity, T. Rowe Price, and Vanguard, though most financial institutions offer them, too.
I personally have created my own target fund in a self-directed IRA at a no-load mutual fund company. Actually, it’s four stock- and bond-index l funds that together work like one target-date fund. These market-tracking funds buy many, or all, of the securities that make up a market index to match that index’s performance. As I make my regular annual contribution to my retirement savings, I pick which of these funds to ramp up. Some years I’ve added only to the bond portion; in other years, I’ve invested exclusively in the equity side.
- Roll over any old 401(k) accounts. This is smart housecleaning if you’ve had several jobs over your career, because inevitably you have retirement money sitting in different accounts.
If you have multiple old 401(k)s, for example, it makes sense to consolidate them into one self-directed rollover IRA through a major mutual fund company, says Curtis.
- Get rid of investments with excessive costs. Check the annual expenses for all your mutual funds. If any charge more than 1 percent of assets per year, seek out lower-cost replacements — and consider index funds, as I do.
If you’re invested primarily in actively managed mutual funds, costs should be a key consideration and reviewed annually, says Curtis. For example, if an actively managed U.S. large-cap fund charges a management fee of 1 percent or more, it pays to switch to an S&P index fund with lower costs. The Vanguard S&P 500 Index Fund, for example, has an annual expense ratio of 0.17 percent.
- Weed out your stock holdings. “Many people own a few stocks in their portfolio that they bought years ago because they either liked the product the company sold or someone recommended it,” says Curtis. “But they long ago ceased paying attention, or following, the companies’ progress and financials. It takes a lot of time to follow individual stocks and to be aware of all the different risks that companies face. This money could be put to better use in a mutual fund or Exchange Traded Fund (ETF) which provides more diversification.”
And don’t be afraid to take a loss while you’re weeding. “Not all investments work out. The silver lining is that capital losses are tax deductible,” says Curtis. But better yet, you can deploy the capital to a better investment.”
- Finally, consider hiring a financial adviser. In the Wells Fargo study, 59 percent of respondents said they could use financial advice to deal with volatility in their 401(k). I bet many investors without 401(k)s feel they could use advice, too.
To reduce angst, hire a financial adviser, preferably one with the Certified Financial Planner designation. The national groups of financial planners that offer searchable databases: the National Association of Personal Financial Advisors, The Garrett Planning Network, the Financial Planning Association and the Certified Financial Planner Board of Standards.
Now about those roses bushes — it looks like they can use some pruning.