By FPA member Kevin Moore, CFP®, AIF®
Last Updated: February 28, 2011
January was a month filled with reflection and planning for the year ahead. We are often good at making resolutions for the year ahead, however often those resolutions are forgotten by the end of January. While we may be able to start and re-start diets or exercise programs during the year, it is important that investors make resolutions about their portfolios in the beginning of the year. It is equally as important that they keep the following resolutions.
The first resolution is to rebalance your portfolio. Rebalancing is a three-step process. The first step is to review the current asset allocation of your portfolio (how much money do you have invested in stocks and how much in bonds). The second step is to compare the current allocation with that of your target allocation. If your current allocation is more than five percentage points away from your target allocation, you may need to rebalance your portfolio. This third step entails selling enough of the assets in your current portfolio that have a larger weighting than targeted so that their weighting is in-line with the target. The proceeds of these sales would then be invested in the assets that currently have a weighting below the targeted amount.
Rebalancing helps ensure that your account is allocated appropriately, as well as forcing the habit of taking profit (i.e. selling high) and investing in assets that have not performed as well recently (i.e. buying low). If your accounts are retirement accounts, taxes are probably not an issue. However, if your accounts are not retirement accounts, then you should also consider the tax implications of rebalancing.
The second resolution is to revisit your goals. There are specific reasons investors choose to invest their money into financial instruments. For example, individuals invest in Individual Retirement Accounts (IRAs) or 401(k)s to save for retirement. Despite our best-laid plans and intentions, life events can have a way of changing those plans. Therefore, it is important to revisit the reason(s) you have investment accounts. It is probable that you have various investment accounts, each with a goal. Sometimes those goals are shared and sometimes they are unique. However, without a clear goal in mind, it is difficult to plan and manage your investment accounts.
The third resolution is to revisit your contributions. Much like our goals, the amount of money you can invest in your various accounts can change during the year. Perhaps you have had a salary increase, a reduction in hours, an increase in expenses, or been the recipient of an inheritance. Regardless of the reason(s), reviewing the amount of money you invest annually is an important exercise not only to ensure you are contributing enough to pursue your goals, but also to ensure you are taking advantage of tax incentives.
The beginning of the year is a beginning in many ways and often filled with hope and optimism. These three simple resolutions will help ensure that you start your investment year on the right foot and help you keep to your resolutions.
Kevin Moore, CFP®, AIF®, is a principal at i*financial, located in San Antonio, TX. Securities and advisory services offered through Commonwealth Financial Network®, member FINRA/SIPC, a registered investment adviser. Strictly intended for individuals in: CA, CO, CT, DC, LA, MD, MN, NC, OK, OR, TX, VA, WA, WI . No offers may be made or accepted from any resident outside these states due to various state and registration requirements regarding investment products and services.
