There is no better time to take a fresh look at your
investment strategies than the beginning of the new year. And while there is no
one-size-fits-all approach to investing for the future, reviewing your goals
annually can help you stay on track from month to month--and year to year.
The goal of an investment review is to make sure you’re in
position to pursue important short- and long-term goals during the coming year.
However, it is difficult to get a clear vision of the future without first
reviewing whether you have managed to stay on track during the past year.
For example, ask yourself the following questions:
·
Are your savings and investing goals still
realistic, or might you now need to accumulate more (or less) money than
originally planned?
·
Has the time frame for any of your financial
goals--such as your retirement date--changed in the past year?
·
Have you been contributing as much as possible
to your tax-deferred retirement accounts? The 2013 and 2014 contribution limits
are $17,500 for employer-sponsored retirement accounts, such as 401(k)s and
403(b)s, plus another $5,500 in catch-up contributions if you are over the age
of 50. For traditional and Roth IRAs, the limits are $5,500 with another $1,000
in catch-up contributions.
Correcting for Asset
Allocation “Drift”
You should also be aware that your asset mix, or asset
allocation, is always subject to change.1 That’s because investment
performance could cause the value of some of your assets to rise (or fall) more
than others. When an asset allocation shifts due to market performance, it is
said to have “drifted” or become unbalanced.
In this example, the original 70% allocation to domestic stocks would have grown to 79.4%, while all the other allocations would have shrunk, reducing their intended risk reduction role in the portfolio. As always, past performance is no guarantee of future results.2
Bonds haven’t been as
volatile as stocks over long periods of time, but recent history shows that
they too can experience performance patterns that may alter asset allocation
over time. Consider the divergence of the stock and bond markets in 2008 and
how that affected asset allocations. While the S&P 500 lost 37% during this
period, long-term U.S. government bonds gained 23%. A portfolio composed of 50%
of each at the start of the year would have shifted to an allocation of 34%
stocks and 66% bonds at year’s end.3
If you have multiple investment accounts, determining
whether to rebalance may involve several steps, beginning with a check of your
overall allocation.4 This entails figuring how your money is divided
among asset classes in each account and then across all accounts, whether in
taxable brokerage, mutual fund or tax-deferred accounts.
How often should you rebalance, and what are some general
guidelines? The usual answer is anytime your goals change; otherwise, at least
once a year. However, to keep close tabs on your investment plan and make sure
it doesn’t drift far from your objectives, you may prefer to set a percentage
limit of variance, say 5% on either side of your intended target that would
trigger a review and possible rebalancing.
How you go about rebalancing will depend on your particular
circumstances. If you are making regular contributions to a retirement plan,
the easiest way to adjust the makeup of your contributions is to build up
underweighted assets. This avoids transaction costs and does not require
liquidating and reinvesting assets, which can have tax consequences. In
general, it’s a good idea to avoid liquidating existing assets unless the tax
consequences work in your favor.
If you must rebalance assets outside of your retirement
plan, try to do it in another tax-deferred account such as an IRA, again to
avoid immediate tax consequences. And if you’re looking for new money to help
rebalance your portfolio, consider using a lump-sum payment such as a bonus or
tax refund.
This article is not intended to provide specific investment advice or recommendations for any individual. Consult your financial advisor, or me, if you have any questions.
1Asset allocation
does not assure a profit or protect against a loss.
2Source: Wealth Management Systems Inc. The
performance shown is for illustrative purposes only and is not indicative of
the performance of any specific investment. The hypothetical returns used do
not reflect the deduction of fees and charges inherent to investing. Your
results will vary. Example
is for the 20 years ended December 31, 2012. Domestic stocks are
represented by the total returns of Standard & Poor’s Composite Index of
500 stocks, an unmanaged index that is generally considered representative of
the U.S. stock market. Bonds are represented by the total returns of the
Barclays Aggregate Bond index. Money markets are represented by the total
returns of the Barclays 3-Month Treasury Bills index. Non-U.S. stocks are
represented by the total returns of the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE®) index. It is not possible to
invest directly in an index. Past performance is not a guarantee of future
results.
Investing in stocks involves risks, including loss of
principal. Bonds are subject to market and interest rate risk if sold prior to
maturity. Bond values will decline as interest rates rise and are subject to
availability and change in price. Foreign investments involve greater risks
than U.S. investments, including political and economic risks and the risk of
currency fluctuations, and may not be suitable for all investors. Treasury
bills are guaranteed by the U.S. government as to the timely payment of
principal and interest, and, if held to maturity, offer a fixed rate of return
and fixed principal value.
3Source: Wealth Management Systems Inc. The
performance shown is for illustrative purposes only and is not indicative of
the performance of any specific investment. Your results will vary. Stocks are
represented by the S&P 500, bonds by long-term U.S. government bonds, which
are guaranteed by the U.S. government as to the timely payment of principal and
interest, and, if held to maturity, offer a fixed rate of return and fixed
principal value. Investors cannot invest directly in any index. Past
performance does not guarantee future results.
4Rebalancing strategies may involve tax
consequences, especially for non-tax-deferred accounts.
The opinions voiced in this material are
for general information only and are not intended to provide specific advice or
recommendations for any individual. We suggest that you discuss your specific
situation with a qualified tax or legal advisor.
This article was prepared by Wealth
Management Systems Inc., and is not intended to provide specific investment
advice or recommendations for any individual. Please consult me if you have any
questions.
Because of the possibility of human or
mechanical error by Wealth Management Systems Inc., or its sources, neither Wealth
Management Systems Inc., nor its sources guarantees the accuracy, adequacy,
completeness or availability of any information and is not responsible for any
errors or omissions or for the results obtained from the use of such
information. In no event shall Wealth Management Systems Inc. be liable for any
indirect, special or consequential damages in connection with subscribers’ or
others’ use of the content. Wealth Management Systems, Inc. and LPL Financial
are not affiliated entities.
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