Helpful miscellaneous articles regarding our retirement plan and planning. Like you, I review my retirement nestegg and plan from time to time. Recently, I went though some continued education for some credentials I maintain and it occurred to me that we all could use a review about these issues. So with your help, we will share and post articles and info that may be helpful and of interest to many of you in this section.
Editor: Last year’s advice but still applicable for a quick review.
A Year-End Portfolio Review in 6 Easy Steps
Check up on your portfolio's health--and that of your whole plan--as the year winds down.
As 2019 winds down, investors can look back on an excellent year. While investors fretted about an impending recession in late 2018, those worries abated in 2019 and U.S. stocks posted a tremendous rally. Growth stocks were the standouts, but non-U.S. equities also performed exceptionally well. And while bonds are often the casualties when investors are optimistic about the economy's strength, in 2019 they were just right; while yields remained meager, Federal rate cuts and the expectation that the Fed will stand pat going forward buoyed bond prices.
If you're a disciplined investor, you can use an annual portfolio review as a way to check up on your portfolio--and potentially make some changes--within the context of your well-thought-out plan. After all, even if you haven't actively made changes to your portfolio mix, the contents of your portfolio may have shifted.
I like the idea of thinking of your annual portfolio review as an inverted pyramid, with the most important jobs on the top and the least important ones at the bottom. That way, if you run out of time and need to give something short shrift, you'll have attended to the most important considerations first.
Here are the key steps to take.
Begin your portfolio checkup by answering the question: "How am I doing on my progress to my goals?"
For accumulators, that means checking up on whether your current portfolio balance, combined with your savings rate, puts you on track to reach whatever goal you're working toward. Tally your various contributions across all accounts so far in 2019: A decent baseline savings rate is 15%, but higher-income folks will want to aim for 20% or even higher. Not only will high earners need to supply more of their retirement cash flows with their own salaries (Social Security will replace less of their working incomes), but they should also have more room in their budgets to target a higher savings rate. You'll also need to aim higher if you're saving for goals other than retirement, such as college funding for children or a home down payment. If your 2018 savings rate will fall short of what you'd like it to be, take a closer look at your household budget for spots to economize. In addition to assessing savings rate, take a look at your portfolio balance: Fidelity Investments has developed helpful benchmarks to gauge nest-egg adequacy at various life stages.
If you're retired, the key gauge of the health of your total plan is your withdrawal rate--all of your portfolio withdrawals for this year, divided by your total portfolio balance at the beginning of the year. The "right" withdrawal rate will be apparent only in hindsight, but the 4% guideline is a good starting point. (Remember: The 4% guideline isn't about taking 4% of your portfolio year in and year out.)
All-in-one retirement calculators can also be useful when assessing the viability of all aspects of your plan. Tools like T. Rowe Price's Retirement Income Calculator and Vanguard's Retirement Nest Egg Calculator bring all of the key variables together and help you identify areas for improvement
Step 2: Assess your asset allocation.
Once you've evaluated the health of your overall plan, turn your attention to your actual portfolio. Morningstar's X-Ray view--accessible to investors who have their portfolios stored on Morningstar.com or via Morningstar's Instant X-Ray tool--provides a look at your total portfolio's mix of stocks, bonds, and cash. (You can also see a lot of other data through X-Ray, which I'll get to in a second.) You can then compare your actual allocations to your targets. If you don't have targets, Morningstar's Lifetime Allocation Indexes are useful benchmarking tools. High-quality target-date series such as those from Vanguard and BlackRock's LifePath Index Series can serve a similar role for benchmarking asset allocation. My model portfolios can also help with the benchmarking process.
Given stocks' very robust performance in 2019, many investors' portfolios are heavy on equities. That's not a huge deal for younger investors with many years until retirement, but is a far more significant risk factor for investors who are nearing or in drawdown mode: Insufficient cash and high-quality bond assets to serve as ballast could force withdrawals of stocks when they're in a trough, thereby permanently impairing a portfolio's sustainability. If your portfolio is notably equity-heavy relative to any reasonable measure and you're within 10 years of retirement, de-risking by shifting more money to bonds and cash is more urgent. You could make the adjustment all in one go or gradually via a dollar-cost averaging plan. Just be sure to mind the tax consequences of lightening up on stocks as you're shifting money into safer assets; focus on tax-sheltered accounts to move the needle on your total portfolio's asset allocation.
Step 3: Check the adequacy of liquid reserves.
In addition to checking up on your portfolio's long-term asset allocations, your year-end portfolio review is a good time to check your liquid reserves. If you're still working, holding at least three to six months' worth of living expenses in cash is essential; higher-income earners or those with lumpy cash flows (looking at you, "gig economy" workers) should target a year or more of living expenses in cash.
For retired people, I recommend six months to two years' worth of portfolio withdrawals in cash investments; those liquid reserves can provide a spending cushion even if stocks head south or bonds take a powder. Retirees whose portfolios are equity-heavy can use rebalancing to top up their liquid reserves.
Step 4: Assess suballocations and troubleshoot other portfolio-level risk factors.
For a few years there, U.S. stocks of every persuasion seemed to move in lock step: Value stocks' performance was in line with growth names, while small caps' returns were in line with large. Not so for the past several years, as growth stocks have trumped value. Check your portfolio's style-box exposure in X-Ray to see if it's tilting disproportionately to growth names. As a benchmark, a total U.S. market index fund holds roughly 25% in each of the large-cap squares, 5% apiece in the mid-cap boxes, and about 2% in each of the small-cap boxes. Not every portfolio has to be right on the top of the index, but the style-box view lets you see if you're making any big inadvertent bets.
While you're at it, check up on your sector positioning; X-Ray showcases your own portfolio's sector exposures alongside those of the S&P 500 for benchmarking.
On the bond side, review your positioning to ensure that your bond portfolio will deliver ballast when you need it. Thus far in 2019, high-quality bonds have performed exceptionally well, but lower-quality bonds have delivered even stronger returns. If you're adjusting your fixed-income portfolio, redeploying money from higher-risk bond segments into lower-risk alternatives (think high-quality, short- and intermediate-term bond funds) will improve your total portfolio's diversification and risk level.
Step 5: Review holdings.
In addition to checking up on allocations and suballocations, take a closer look at individual holdings. Scanning Morningstar's qualitative ratings--star ratings for stocks and Morningstar Medalist ratings for mutual funds and exchange-traded funds--is a quick way to view a holding's forward-looking prospects in a single data point.
If you're conducting your own due diligence, be on alert for red flags at the holdings level. For funds, red flags include manager and strategy changes, persistent underperformance relative to cheap index funds, and dramatically heavy stock or sector bets. For stocks, red flags include high valuations and negative moat trends.
Step 6: Attend to tax matters.
Year-end is also your deadline for several tax-related to-dos, some of which touch your portfolio. If you're still in accumulation mode, review how much you're contributing to each of the tax-sheltered account types that are available to you: IRAs, company retirement plans, and health savings accounts. Contribution limits for 401(k)s, 403(b)s, and 457 plans will be increasing a bit in 2020, to $19,500 for workers under age 50 and $26,000 for workers who are 50-plus. The IRA contribution limit is staying the same--$6,000 for investors under age 50 and $7,000 for investors who are over 50.
In addition, retirees must take required minimum distributions from tax-deferred accounts before year-end. I'm a big believer in taking a surgical approach to RMDs, using those withdrawals to correct portfolio problem spots. Charitably inclined investors who are subject to RMDs should take advantage of what's called a qualified charitable distribution.
With market volatility comes increased opportunities for tax-loss selling, especially in foreign stocks and funds and energy, natural resources, and precious-metals stocks and funds. You can use those losses to offset gains elsewhere in your portfolio, as discussed here .
(As with any of these informative articles, anyone who needs someone to talk to about
this very subject contact me and I can direct you to a knowledgeable advisor).
No comments:
Post a Comment