It’s been another tumultuous year for investors. Gigantic stock market swings, fears of a new recession and continued uncertainty in the job market haven’t made sticking to your portfolio game plan very easy.
But you need to do it anyway.
Here is a seven-step checkup to make sure your investments stay on track.
1. Asset Allocation
Determining how much of your portfolio is in stocks and bonds, and the sub-asset classes in between, is the basis of a good investment plan. When certain types of investments fall, others rise. That means whatever direction your portfolio has taken this year, it’s pretty certain your asset allocation isn’t where it started. You need to get your investment breakdown back to your original plan. Let’s say you previously decided you want 20 percent of your assets in large-cap growth stocks, but that part of your portfolio was smacked down and is now worth only 12 percent of your portfolio. Let’s also say you had 5 percent of your portfolio in precious metals, but as gold soared, your portfolio’s stake in precious metals grew to 13 percent. To bring your portfolio back into balance, you should sell 8 percent of your precious metals investment and reallocate those funds to large-cap growth stocks. If you don’t have an asset allocation plan, create one using sites such as BankRate.com (bankrate.com/calculators/retirement/asset-allocation.aspx). Or, look for a fee-only financial advisor in your area via the Financial Planning Association (fpanet.org) or the National Association of Personal Financial Advisors (napfa.org).
Make sure your mutual funds have followed whatever trend others in that asset class have taken. Let’s say you have a health care fund called Fund ABC. The fund gained 5 percent in 2011. In such a shaky market, that may seem like a good return. But you won’t know for sure until you compare your fund’s performance to other funds in that asset class. To do so, visit fund rating site morningstar.com. You can research the best performing funds in an asset class and also look at the average return for funds of that type. It’s important to compare apples to apples. If you find some funds that gained 15 percent, it doesn’t mean you should be disappointed in your fund’s performance. It all depends on the investments within the mutual fund. But if you do compare apples to apples and find your fund is an underperformer — not just in 2011 but over a three- or five-year period — consider trading it in.
When you check the performance of your individual investments, take a look at the fees. Use morningstar.com to compare mutual funds of the same asset class. If your funds are way more expensive than the average for that asset class, start fund shopping.
4. Tax-loss harvesting
Before you sell any investments, speak to your tax advisor about tax-loss harvesting. You can offset an unlimited amount of capital gains with capital losses. If you have no capital gains, you can use a maximum of $3,000 in capital losses against ordinary income each year, says Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights. If you have capital losses greater than $3,000, the excess can be carried forward to offset capital gains or up to $3,000 in ordinary income in future years.
If you use a financial advisor or tax preparer, take a moment to see if the advice you’ve received is worth whatever you’re paying. If you’re not sure, let him or her know you’re dissatisfied and expect better. If that doesn’t work, start looking for a new pro. Same goes for mutual fund managers who tend to your investments. If a fund has had a manager change and the fund’s performance has suffered and is not in tandem with others in the same asset class, consider a new fund.
6. A gut check
Your tolerance for risk changes over time. This is a good moment to assess whether you’re sleeping at night given your investment selections, and to look at how much time you have before you need to tap your portfolio. If something has changed, make appropriate adjustments to your nest egg.
7. Your savings level
There’s no such thing as saving too much. If you’re not maxing out your 401(k) (or at least socking away enough to get the full employer match) and investing in an IRA every year, try to squeeze some more money out of your budget to earmark for long-term savings. I’ve yet to meet a retiree who said they saved too much.