Many investors may be tempted to review their portfolios only when the markets hit a rough patch, but careful planning is essential in all economic climates. Whether the markets are up or down, reviewing your portfolio can be an excellent way to keep your investments on track, and midway through the year is a good time for a reality check.

1. How are my investments doing?

Review a summary of your portfolio’s total return (minus all fees) and compare the performance of each asset class against a relevant benchmark. For stocks, you might compare performance against the S&P 500, Russell 2000, or Global Dow; for mutual funds, you might use the Upper indexes. (Keep in mind that the performance of an unmanaged index is not indicative of the performance of any specific security and you can’t invest directly in an unmanaged index).

Consider any possible causes of over-or underperformance in each asset class. If any over-or underperformance was concentrated in a single asset class or investment, was that consistent with the asset’s typical behavior over time? Or was recent performance an anomaly that bears watching or taking action? In addition, make sure you know the total fees you are paying (e.g., mutual fund expense ratios, transaction fees), preferably as a dollar amount and not just as a percentage of assets.

2. Is my investment strategy on track?

Review your financial goals (e.g., retirement, college, house, car, vacation fund) and market outlook for the remainder of the year to determine whether your investment asset mix for each goal continues to meet your time frame, risk tolerance and overall needs.

Remember, even if you’ve chosen an appropriate asset allocation strategy for various goals, market forces may have altered your mix without any action on your part. To return your asset mix back to its original allocation, you may want to rebalance your investments. This can be done by selling investments and transferring the proceeds to underrepresented asset classes, or simply by directing new contributions into asset classes that have been outpaced by others. Keep in mind rebalancing may result in commission costs, as well as taxes if you sell investments for a profit.

Am I maximizing my tax savings?

Taxes can take a significant bite out of your overall return. You can’t control the markets, but you can control the accounts you use to save and invest, as well as the assets you choose to hold in those accounts. Consider the “tax efficiency” of your investment portfolio. Certain types of investments tend to result in larger tax bills. For example, investments that generate interest or produce short-term capital gains are taxed as ordinary income, which is usually a higher rate than long-term capital gains. Dividing assets strategically among taxable, tax-deferred, and tax-exempt accounts may help reduce the effect of taxes on your overall portfolio.

Frank Mokosak, CFP® is a Principal and Investor Coach at Mokosak Advisory Group.

 

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