Spring Cleaning Your Investments

Spring is a time of renewal. Seeds sprout, flowers blossom, and portfolios drift. It’s a great time to clear out the garage and to shape-up the landscaping, and it’s also a great time to clean up your investment portfolio. It pays to review your investing plan, to get organized, and to make adjustments heading into the new season.

Investing without a plan is like flying blind. Take a moment and think about the reasons you’re accumulating money. “To build wealth” is not specific enough. Break down each goal; retirement, college savings, new house, etc. Do this first so your current allocation doesn’t distort your judgment. Your investing goals will determine your asset allocation strategy. Your plan should drive your investing activities, allocation and choice of investments. A well-constructed plan helps you focus on your risk-tolerance and your goals for the money you save and invest. You may not want to invest your short-term savings in the same way you invest your retirement accounts because the goals, risks, and time horizons are different.

Think of your various investments as one portfolio. Many investors focus on each individual holding and fail to look at the sum of the parts. Selecting quality investments (mutual funds, exchange-traded funds, stocks and bonds, etc.) is important, but it’s smarter to start by determining whether your overall portfolio allocation is in line with your financial goals and risk tolerance. For example, your overall retirement portfolio may be made up of different accounts 401(k)’s, 403(b)’s, and IRAs, each with different individual investments, but they should be coordinated and working in tandem toward the same goal.

Getting your portfolio in shape once does no good unless you establish a process for reviewing your portfolio and investment holdings on a regular basis. You don’t have to check your investments daily, weekly, or even monthly. Doing so can make you nervous which often leads to bad decision-making and market-timing. Checking in and rebalancing your portfolio quarterly or semi-annually is sufficient for most investors. Revisit your portfolio allocation and tweak your investing plan at least once per year to ensure that everything is still working together.

Track down your most recent statements and organize your records the same way each time. You should review all monthly, quarterly and yearly documents from your investment accounts and keep them in a paper file, on your computer, or in the cloud. Review each statement and take note of anything that looks strange. You don’t need to be overly meticulous, but scan through and see if anything jumps out. There may be an account fee, a sales charge, or a fund company change that merits further investigation or that you’d like more information about.

Review your current investment holdings. Find a way to take a consolidated, overall view of your holdings as one portfolio, or as a single portfolio for each investing goal. Categorize your portfolio(s) by goal, account, and by asset class on a spreadsheet. This will help you see how well-diversified you are across different asset classes for each goal. Your spreadsheet may reveal a complex tangle of individual holdings across different accounts. This is particularly common if you have a number of old 401(k)s from previous employers and can make your portfolio hard to track and monitor efficiently.

Establish a monitoring process for your individual holdings, and review them against appropriate benchmarks on a regular basis. For example, did your large-cap mutual funds keep up with the S&P 500 Index for the time period? How did their performance compare to their peers? Is their expense-ratio above or below average compared to its peers? If a fund isn’t keeping up with it’s benchmark over time, and it’s more expensive than its peers, it may be time to reassess that fund. If needed, make changes to your allocation. It can be helpful to do this with the guidance of an advisor, but www.Morningstar.comis a good free resource to start analyzing investment holdings and to compare mutual funds.

After you review your allocation across all of your various accounts, you can buy or sell holdings or add new investment dollars to get back to your prescribed allocation to be sure that your portfolio is consistent with the risk and return targets in your investing plan. It’s common to find that one or two asset classes have appreciated beyond their target (well done!) and that a couple have lagged behind (that’s okay too!). The old adage is to “buy low” and “sell high,” and rebalancing back to allocation targets is how it’s done. Our natural human inclination is to do the opposite; we presume winners will keep winning and that the losers are holding us back. But “buying high” and “selling low” is no recipe for success. Many workplace retirement plans (401k, 403b, etc.) allow for setting automatic rebalancing at set intervals. You’ll still need to review your allocation regularly, but automatic rebalancing can be a big help.

Decrease your financial clutter by consolidating your accounts as much as possible. For example, unless there is a compelling reason to leave an old 401(k) with a former employer, it may be easier to monitor and manage your portfolio if you roll the account into an IRA (individual retirement account) or even into your current employer’s 401(k) plan if allowed. Make sure to do a“direct transfer” between financial institutions to avoid any tax withholding or possible penalties. You do not want the IRS to deem that you have received a taxable distribution from the account. Likewise, you can consolidate like account-types such as IRAs, Roth IRAs, or taxable brokerage accounts that you may hold at different companies.

Depending on what fits your investing plan, map out when you will make desired contributions and any necessary withdrawals. You can contribute up to $18,500 into workplace retirement plans like a 401k each year. If you’re eligible, you can also contribute up to a total of $5,500 to IRAs and Roth IRAs. There are also other account types that may fit your investing goals, like an HSA (Health Savings Account) or 529 Plan for education expenses which each have their own contribution limits and eligibility requirements.

It’s also crucial not to ignore any required minimum distributions, or RMDs. For example, if you are age 70 or over with a pre-tax 401k or IRA, you will have an annual RMD. Likewise, if you’ve inherited a retirement account from a loved-one, you may also be required to take a minimum withdrawal each year. Missing RMDs can cause taxation and penalties, so make this an important part of your investment review process.

This has nothing to do with portfolio performance or investment selection, but is super important! Make it a habit to review the beneficiary for each of your investment accounts. If you’re recently married, you may want to ensure your spouse and not your parents is your primary beneficiary. If you’re a new parent, make an update so your child is listed as a contingent beneficiary. For a taxable brokerage account, there isn’t a beneficiary strictly speaking, but you can add a Transfer-On-Death or “TOD” instruction to pass the assets along upon your death. While you’re at it, double-check any life insurance policies for beneficiaries as well. Absent a listed beneficiary or TOD instructions, your assets will most likely go through probate court and will be divided up by a judge according to your Will if you have one, or by State law if you don’t.

“Set it and forget it” doesn’t work for investments because goals change over time. Establishing a review process to carry out at least once per year can help you keep tabs on your investments and to make changes along the way. If you find yourself stagnant or if you struggle to take the emotion out of investing decisions, you’re not alone. It can help to work with an independent advisor who knows your financial situation and who understands our human biases. Spring cleaning your investments will provide you peace of mind – so you can sleep better at night.