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Ten Steps for 2023

Adam M. Grossman

I’M NOT BIG ON MAKING New Year’s resolutions. Still, January is a good time to conduct some financial housekeeping. Below are 10 ideas to consider as the calendar turns over.

1. Portfolio cleanup. I sometimes feel like a broken record when I talk about the disadvantages of actively managed mutual funds. Among other issues, they tend to underperform and are tax-inefficient. But here’s the challenge: Even after factoring in 2022’s decline, the S&P 500 has risen more than 600% since 2009’s market bottom.

As a result, mutual funds that have lagged behind the market may still have substantial gains. If you own a fund like this in a taxable account, it presents a dilemma: If you hold onto it, there’s a good chance it’ll continue to underperform while burdening you with unnecessarily large annual tax bills. On the other hand, if you sell, you guarantee yourself a taxable gain.

This difficult choice often leads to inertia. Investors hang onto funds like this because they hate the idea of intentionally incurring a gain. My recommendation: Don’t view it as an all-or-nothing decision. Make a plan to sell a little each year. To give some structure to this decision, you might set a capital gains “budget” for your portfolio—limited to, say, 0.5% or 1% of your portfolio’s value each year. Then you can slowly work your way out of your undesirable holdings.

2. Portfolio checkup. The new year is a good time to conduct a risk audit on your portfolio. In addition to reassessing your asset allocation—the split between stocks, bonds and other assets—you’ll want to audit the risk level of individual holdings.

A few years back, brokers—including Vanguard Group—decided to ban certain types of investments, including leveraged and inverse exchange-traded funds, in their clients’ accounts. That was a clear verdict on the inherent riskiness of these investments. But most investments don’t come with a warning label. In general, my litmus test is to ask whether you could explain a given investment to a 10-year-old. If a holding is so complicated that you can’t explain it in simple terms, you should probably steer clear.

3. Interest rate upgrade. Just 12 months ago, there wasn’t much difference between bank checking accounts, money market funds and Treasury bonds. They were all offering virtually no interest to savers. But that all changed in 2022. While the Federal Reserve’s seven rate hikes inflicted pain on the bond market this year, the outlook going forward is much more positive.

Short-term Treasury bonds are now paying some 4.7%. Even online savings accounts, such as those offered by Ally Bank and Capital One, are paying 3.3%. Many traditional banks, meanwhile, have been dragging their feet and are still paying next to nothing on savings. If you have a material amount of cash in the bank, this is a good time to investigate higher-yielding options.

4. Tax strategies. No matter what life stage you’re at, there are always tax strategies to consider. As your financial situation evolves, though, the set of relevant strategies will change. If your income is rising, for example, it might be worth looking at new charitable giving strategies or increasing the amount you’re deferring into retirement accounts.

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On the other hand, if you’re later in your career and reducing your hours, it might make sense to switch to a Roth 401(k), assuming your employer offers that option. And finally, if you’re in the early years of retirement, a Roth conversion might make sense. Since the tax clock resets each January, this is a perfect time to look through the toolbox of tax strategies.

5. New rules. Once again, in the final days of the year, Congress passed, and the president signed, a host of new tax rules. For the most part, these are positive changes, opening the door to new strategies and providing greater flexibility on existing strategies. Among the changes: increasing the age at which required minimum distributions must begin, allowing for the rollover of (some) unused 529 college savings funds into a Roth IRA and increasing contribution limits on tax-deferred accounts for those age 50 and older. There are many other changes, too numerous to list here. To learn more, I recommend two excellent summaries, one on HumbleDollar and the other on Kitces.com.

6. Prepping for a rainy day. As the new year begins, it’s worth revisiting your insurance needs. ​Two of the most cost-effective types of insurance are umbrella and term life. Because they cover relatively low-probability risks, it’s easy for insurance companies to offer substantial coverage at reasonable rates.

Another recommendation: Put together a “just in case” list. If something were to happen to you, this list would provide a roadmap of sorts to your finances. It should also provide your family with other important information, such as the password to your phone. There are various ways to put together a list like this. I’ve seen some families create a Google doc and share it with family members. Others keep it on paper somewhere in their home, and have informed family members and trusted advisors where they can locate it. Finally, I’ve assembled a PDF template, which you’re welcome to download.

7. Custodial provisions. If you have minor children, the most important estate planning task, in my opinion, is to name a custodian who would take care of your children if something were to happen to both parents. Just as important is to periodically review these choices. If your chosen custodian has moved, for example, or is unwell, you might want to consider a substitute.

8. Account beneficiaries. If you have a retirement account, such as an IRA or 401(k), you probably chose beneficiaries when you opened these accounts. But things change, so it’s important to review beneficiary designations regularly. The same applies to life insurance policies. Less well known is the fact that you can set up beneficiary designations on non-retirement accounts. This mechanism is known as transfer-on-death and can help your estate move through the probate process more quickly.

9. Mindful spending. Author Ramit Sethi uses the term “money dials” to help people think about their spending priorities. He has 10 dials, including travel, generosity and convenience. Something I’ve found is that, over time, our budgets have a tendency to drift away from our values. That’s because, as the saying goes, life happens. We get busy and don’t always stop to think about how the pie is being divided. Sethi’s recommendation is to slow down and take the time to take stock.

10. Tuning out nonsense. In 1973, the Italian singer Adriano Celentano released a song with the unusual title Prisencolinensinainciusol. That’s not Italian; it’s gibberish. But if you listen to the song, you might find that it sounds a lot like English. That was Celentano’s goal, and it became a huge hit in Europe because it sounded like an American song.

This relates to my final recommendation for the new year. Listen to the news on any given day, and you’ll hear no shortage of financial commentary. Market experts opine on everything from the economy to the market to individual stocks. But here’s the problem: While this commentary is often very articulate, the reality is that financial markets are driven by too many variables to be predictable.

That makes most of this commentary effectively useless. Like Prisencolinensinainciusol, it might sound like it makes sense, but listen critically, and you’ll discover that a fair amount of it is really just entertainment. To make financial progress in the year ahead, I suggest tuning out these market experts and instead focusing on things over which we have more control.

Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on Twitter @AdamMGrossman and check out his earlier articles.

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Jerry Pinkard
Jerry Pinkard
2 months ago

I went to the link provided for 2023 tax changes, kitces.com. Wow! My head is still spinning. The new law makes a complex topic even more complex. A boon for financial advisors.

Thanks for posting.

Adam Grossman
Adam Grossman
2 months ago
Reply to  Jerry Pinkard

Agreed, it’s a lot. The nice thing, though, compared to the first Secure Act, is that these generally all look like positive changes.

Yiyin Ho
Yiyin Ho
2 months ago

I’m trying to do #1 this year – simplifying. The portfolio is very overweight in APPL from purchases made more than a decade ago. My plan for this (over next few years) is to open a donor advised fund, donating to it the appreciated shares in whatever fund/etf/stock I don’t want to keep, and then buying the index funds (in my simplified plan) with cash.

Last edited 2 months ago by Yiyin Ho
Adam Grossman
Adam Grossman
2 months ago
Reply to  Yiyin Ho

A donor-advised fund is a great idea if you have charitable intentions. One thing to keep in mind: Unfortunately, with the standard deduction so high since 2018, many tax taxpayers don’t receive any incremental benefit for charitable contributions. A way to maximize the tax benefit is to “bunch” your charitable gifts into one large contribution to your DAF in a single year to help push your deductions over the standard deduction.

Andrew Forsythe
Andrew Forsythe
2 months ago

Adam, thanks for the helpful list. As for #3 and the higher interest rates available for cash, CIT Bank is currently paying 3.85%: Savings Account Options | CIT Bank and Synchrony Bank is paying 3.75%: Online High Yield Savings Accounts – December 2022 Rates | Synchrony Bank

Last edited 2 months ago by Andrew Forsythe
Nate Allen
Nate Allen
2 months ago

As stated in an earlier comment, My Savings Direct is offering a 4.35% rate currently. I keep an eye on the investopedia article (have to scroll to bottom list) which is updated several times per month with the newest best one.

Adam Grossman
Adam Grossman
2 months ago

Thanks, Andrew. I look at these banks sort of like gas stations: They’re all selling the same product, so investors should choose the one offering the best rate. Savers should also be sure to keep an eye on rates to be sure the bank they’ve chosen is keeping up with the competitors. One interesting service that automates this is MaxMyInterest, though they take a small fee for their service.

Kenneth Tobin
Kenneth Tobin
2 months ago

Yes Doctors do think they are smarter than the markets, as well as millions of Americans. But passive investing has finally surpassed active investing just 2-3 years ago SO INVESTORS Are getting smarter. We have 50yrs of replicable success thanks to jack Bogle. White Coat Investor does have much useful information thanks to Dr Jim Dahle. Check it out

Last edited 2 months ago by Kenneth Tobin
Adam Grossman
Adam Grossman
2 months ago
Reply to  Kenneth Tobin

Agreed – Dr. Dahle has done an enormous service for investors. Yes, he’s running a business, but it’s probably good that he is. It ensures that he continues working hard to communicate his commonsense message to investors.

Kenneth Tobin
Kenneth Tobin
2 months ago

No good reason to ever own actively traded funds. Lots of investors with big losses last yr might see cap gains and pay taxes. This is a wonderful website along with Bogleheads.org and White Coat Investor. Look at JL Collins site as well. The mkts will come back to greater heights

Guest
Guest
2 months ago
Reply to  Kenneth Tobin

I’m glad you find White Coat Investor a helpful site. (Here’s where many HD readers may disagree and thumbs down my comment!)
I worked for many years at a very well known and highly reputable international financial institution – not a bank. I enjoyed helping investors with asset allocation, mutual fund selection, stock trading, and some client servicing of accounts. By far and I mean by far, the worst investors were doctors. And that observation was common throughout our office. Doctors consistently felt, because they were doctors and were quite smart, that they could also make wise financial decisions on their own and everyone else was wrong. Doctors would regularly disagree with our recommendations on diversification, tax smart investing, appropriate asset allocation and we found that rather humorous. On the other hand, we often found engineers far more prepared, curious, professional, and prudent in their investment decision making.

Paula Karabelias
Paula Karabelias
2 months ago
Reply to  Guest

I agree with you 100% , having worked with engineers ( married one) and always had doctors as neighbors.

johny
johny
2 months ago

I would like to add to the list 1) change all your passwords and 2) do the annual practice run of what your spouse would do if you got incapacitated. This would include logging into all accounts. Lastly, 3) create an account at all the major credit agencies and freeze your account.

The other thing i would suggest to better protect ourselves is get a separate computer (i would get a low-end Mac) and dedicate it to financial activities. Likewise have an email address only for financial purposes and have no other emails appear on that computer.

Having a dedicated financial e-mail would make scam financial e-mails rather obvious when it appears on your regular e-mail address.

Last edited 2 months ago by johny
Chazooo
Chazooo
2 months ago
Reply to  johny

Interesting suggestion about the separately-purposed PC and email address for financials, but how long does it take for the scam/spam emails to show up there? Like a new telephone number, the telemarketers, scammers, et al are on it immediately if not sooner.
Trying to remain current with everything nowadays is a bear, so tip of the hat to your suggestions!

johny
johny
2 months ago
Reply to  Chazooo

hi. In terms of spam emails showing up in my dedicated financial e-mail, after about 10 years doing it, I can say – perhaps it is thanks to Google’s sophistication in catching them – that is working very well. It is kinda rare I see an email that doesn’t belong there.

Jonathan Clements
Admin
Jonathan Clements
2 months ago
Reply to  johny

Unfortunately, these spam filters appear to be too picky. It seems HD’s twice-weekly newsletters often end up in readers’ spam folder, or so folks tell me.

Jerry Pinkard
Jerry Pinkard
2 months ago
Reply to  johny

I totally agree on a test run of your plan for survivors. Many financial plans are complicated and knowing that your loved ones can follow it is very comforting.

Adam Grossman
Adam Grossman
2 months ago
Reply to  johny

All great ideas, thanks. The challenge these days is the inherent tension between convenience and security, but these seems like reasonably easy steps to help stay one step ahead of the scammers.

Edmund Marsh
Edmund Marsh
2 months ago

Nice list
#3 And Emigrant’s My Savings Direct is 4.35. #7 Deciding on a custodian was tough, but definitely added to peace of mind. #8 In states that allow it, a Lady Bird deed is like a TOD for a home.

Paula Karabelias
Paula Karabelias
2 months ago
Reply to  Edmund Marsh

Why a “Lady Bird” deed? A recovable trust would accomplish the same thing and you can put your other assets in it .

Nate Allen
Nate Allen
2 months ago
Reply to  Edmund Marsh

Happy to see someone mention My Savings Direct. I just opened a bank account with them, and except for the few day wait (likely due to backlogs because they are the highest right now) it was very easy to open an account with them. I regularly check the investopedia article that updates with the highest savings rates.

Of course, you can often find a checking account with an even higher rate, but there are gimmicks and hoops associated, such as only up to a $3,000 balance, or requiring 10 debit card transactions and 2 recurring auto-deposits a month, or other stuff I don’t want to deal with.

I have also toyed with just using a money market fund inside of a cash management account at Fidelity which would assure me of always having almost the highest rate but not quite the highest rate. The advantage would be I wouldn’t need to keep hopping banks every time one became higher.

For cash that is not needed for regular payments every month, but instead is reserved for emergency use, laddering CDs or treasuries can pay even more.

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