LOOKING TO CONDUCT a review of your investments? Below is a five-point end-of-year housekeeping checklist.
Suitability. When it comes to the world of investments, the most common types of assets are stocks and bonds—but they aren’t the only ones. There are alternatives like real estate and commodities and, of course, there’s bitcoin, which has more than doubled this year. Which of these is right for you? Since everyone is different, the first litmus test is to assess the suitability of the types of assets you own.
What does this look like in practice? I’d focus on two points. First is liquidity. Traditional investments can be turned into cash overnight, while alternative investments are often less accessible. You’ll want to be sure each investment aligns with the timeframe in which you’ll need those funds.
The second factor is risk. While you can’t predict future returns, you can consult past volatility. Things like bitcoin have seen much more significant price swings than stocks, and stocks have seen much more significant price swings than bonds. For some, wild swings wouldn’t be a problem, but everyone is different. Here again, you’ll want to be sure your investments are aligned with your needs.
The key is to avoid what I call the brother-in-law problem. An investment that might be perfectly appropriate for someone else may not be a fit for you. When well-meaning friends or relatives offer investment tips, you may want to just nod politely.
Asset allocation. Assuming you have a suitable set of investments, the next step is to look at the mix. This is called asset allocation and, while there are many rules of thumb out there, I’m not sure that’s the right approach. Instead, I recommend asking yourself three questions:
Asset location. Next, review the type of account where you hold each of your investments. A common question, for example, is where bonds should be held. If they’re in a retirement account, that shields the interest they generate from taxes each year. But if bonds are in a taxable account, that makes them more readily available, especially if you’re younger than 59½, the age at which you can take penalty-free withdrawals from retirement accounts.
The bottom line: Each account type has its own tax treatment and, in some cases, access limitations. The key is to allocate your dollars across the set of accounts that best aligns with your withdrawal timeframe and tax picture.
Portfolio structure. In his book, The Missing Billionaires, Victor Haghani highlights an often-overlooked point. Sometimes investors have all the right investments, but they’re still exposed to too much risk because they simply own too much of an otherwise-reasonable investment.
How much is too much? In my view, a good threshold is 5%. If an individual stock is 5% of your portfolio and it drops by half, the overall impact would be a loss of just 2.5%. That might be unwelcome, but it would be tolerable. Even if it turns into the next Enron, the loss would be just 5%—still not catastrophic. If you have a stock that’s over that threshold, you might look for ways to systematically chip away at it. You could give some to charity or to family, or you could sell a bit each month to slowly rein it in.
Individual holdings. How do you know if something is a “good” investment? Below are five ways to evaluate a mutual fund or exchange-traded fund (ETF):
A final thought: It’s that time of year when market prognosticators begin publishing their forecasts for the new year. That means it’s also a good time to be reminded of Buffett’s observation: “The only value of stock forecasters is to make fortune-tellers look good.”
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 X @AdamMGrossman and check out his earlier articles.
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All good points. What I would add is that we also need to prepare for the psychological impact of a potential losing streak. We’ve enjoyed a long run up in markets with only “transitory” declines (sorry, I couldn’t resist), and a period of serious decline will be more painful than the pleasure we’ve experienced on the ride up. It’s also important that we practice the same advice we often give others: don’t panic and make ill-timed sale decisions.
As always, we also need to remember that most of us are long term investors, with time horizons greater than 10 years. And, if the past 50-60 years of investing experience can provide any guidance, a well structured, low cost, risk-adjusted portfolio will remain our best option.
Another good summary of guiding tenets. Om item #1, “growth” has been killing it and I have certainly benefited. But I had noticed that too in my portfolio analysis when large-cap growth kept getting a bigger and bigger share of all the equities, particularly with just a few companies as you imply.
It would be tempting to put everything in there right now, but we all know how that would likely turn out.
So, re-balancing this year has tended to favor value by shifting some out of tech. When the next plunge happens, I figure people might not need a new graphics chip, but they’ll still need eat.