Cents and Sensibility

Guy Steele

Saturday, August 21, 2004

Annual reviews can keep
investments on right track

YOU may reach a point at which you think you're doing everything you should with your investments -- and then you'll find that things have changed. Maybe your family situation is now different. Or maybe you've discovered that your portfolio has somehow evolved into something other than what it once was. In short, things don't always stay the same. And that's why you need to conduct a portfolio review at least once a year.

If you work with an investment professional, he or she will have a particular method of evaluating your holdings, but every good review should cover at a minimum the following questions:

» Is your portfolio properly diversified? Over time, your portfolio may have become "unbalanced" -- even if you didn't do a thing to it. You may have started out with stocks making up, say, 60 percent of your investments. But during a strong bull market, your stocks could have gained so much value that they now make up 70 percent -- which means you could be taking on more risk than you'd like. Conversely, during a long bear market, your fixed-income holdings such as bonds could take on an increasingly greater percentage of your portfolio's value so that you risk losing some of the growth potential you need. By reviewing your portfolio annually, you can see what adjustments you should make to achieve a suitable level of diversification.

Of course, your definition of "suitable" will change over time. When you're young, you can afford to invest more aggressively. But as you near retirement, you might want to become somewhat more conservative to protect the gains you may have achieved. Consequently during your annual portfolio reviews try to determine if your risk level still fits your time horizon.

» Are your investments performing as they should for you to reach your long-term goals? If you put your portfolio together carefully, you planned on individual investments achieving rates of return strong enough to help you meet your goals. So if some of your investments are laggards over a course of a few years, you may need to replace them.

» Are you paying too much in investment taxes? As you look over your portfolio each year, try to spot opportunities to reduce your investment taxes, which can diminish your real rate of return. For example, as a result of recent tax law changes, taxes on most stock dividends have been reduced to 15 percent; previously these dividends were taxed at your individual tax rate. You may now be able to integrate more dividend-paying stocks into your portfolio, thereby achieving some tax benefits. Your tax adviser can help suggest other ways in which you could cut your investment taxes.

» Have you recently experienced job or family changes? Your employment and family situations will clearly affect your investment strategies. If you've taken a different job, you may have a whole new 401(k) or other employer-sponsored plan to incorporate into your portfolio. And if you've just married, or had a child, you may need to adjust your investments to reflect some important new objectives, such saving for a house or building funds for college.

By exploring these and other questions during your portfolio review, you can help make sure you're making progress toward your key financial goals -- year after year.

See the Columnists section for some past articles.

Guy Steele is a financial planner and head of the Pali Palms office of Edward Jones. Send planning and investing questions to him at 970 N. Kalaheo Ave., Suite C-210, Kailua, Hawaii, 96734, or call 254-0688



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