As we approach the end of 2023, it’s time for investors to conduct a comprehensive year-end portfolio review. The past year has been eventful with market volatility, inflation, rising interest rates, and economic uncertainties. This newsletter outlines a step-by-step guide to help you assess and optimize your portfolio for the upcoming year.
Step 1: Review Your Financial Wellness
Start by asking yourself, “How am I progressing toward my financial goals?” If you are still in the accumulation phase, assess your savings rate as well as your current portfolio balance. You’ll want to work toward saving 15-20% of your income across all your accounts. High-income earners will want to aim for 20% or higher. Retirees should focus on evaluating their withdrawal rate, ensuring it aligns with their long-term financial plan.
Contribution limits for 401(k)s, 403(b)s, and 457 plans will increase in 2024 to $23,000 for workers under age 50 and $30,500 for 50-plus workers. The IRA contribution limit is increasing to $7,000 for investors under age 50 and $8,000 for investors who are over 50.
Step 2: Review Liquid Savings
Verify the adequacy of your liquid reserves (cash, money market, short-term bonds, etc), especially if you are still working. Holding three to six months’ worth of living expenses in cash or equivalent savings is essential. Retirees should hold somewhere between six months and three years’ worth of portfolio withdrawals in cash or low-volatility investments depending on your access to other sources of withdrawals.
Consider where you’re holding your liquid reserves; online savings accounts, money market mutual funds, and laddered CDs offer competitive options. Ensure your choice aligns with your liquidity needs and yield expectations.
Step 3: Examine Your Asset Allocation
Evaluate your portfolio’s asset allocation using tools available at your brokerage, financial adviser or other sources. Compare your current allocations to your target percentages. Research shows that regular rebalancing to realign your allocations improves portfolio performance.
Younger investors can afford to maintain a more aggressive allocation, while those nearing retirement should consider shifting towards more bonds, cash, and other products with lower volatility. When you make changes, consider tax implications and use tax-sheltered accounts for your strategic asset allocation adjustments.
Since the year-to-date return of broad stock indexes has been significantly higher than broad bond indexes, many investors will have a higher ratio of stocks to bonds than when the year started. You should also review the balance between domestic and international stocks, large versus small stocks, etc. You’ll want to take into account investments in all your accounts including company retirement accounts to get a true picture of your overall mix. Take this opportunity to review the asset allocation across your entire portfolio and make necessary adjustments.
Step 4: Consider Inflation Protection
You may have adjusted your portfolio to counter inflation over the past couple of years. Review your inflation protection assets and decide if adjustments would be prudent. For those accumulating, stocks are the typically inflation-beating investment. For retirees heavily invested in fixed-rate assets, Treasury Inflation-Protected Securities (TIPS) and I-Bonds are a standard hedge against inflation.
Step 5: Analyze Concentrated Holdings
If you hold individual securities or highly concentrated funds, review those positions to ensure your holdings align with your long-term objectives and risk tolerance. If you hold significant stock in your employer’s company, determine if diversifying into other assets would be appropriate.
Step 6: Attend to Tax Matters
Year-end is the deadline for various tax-related tasks. Review contributions to tax-sheltered accounts and consider taking advantage of opportunities like tax-loss harvesting and converting Traditional IRA balances to a Roth IRA. Some retirees must fulfill required minimum distributions (RMDs), and charitably inclined investors can explore donations of securities and qualified charitable distributions. In conclusion, a thorough year-end portfolio review is essential for adapting to the evolving financial landscape. By addressing these steps, you’ll be better positioned to navigate uncertainties and set the stage for a financially sound 2024. As always, consult a trusted professional if you’d like help tailoring these recommendations to your specific situation.