Spring Cleaning for Finances

Spring is traditionally the time to clean the garage and to get the yard in shape. It’s also a great time to clean up your investment portfolio. Fresh off tax season, this is a perfect opportunity to get rid of clutter, review your asset allocations and make the necessary changes if your portfolio has strayed from your financial plan.

Here are seven steps to making your portfolio cleaner and more efficient.

Think of your investments as a portfolio. This is the first key step. Many investors focus on each individual holding and fail to look at the sum of the parts. Of course, it is important to invest in quality mutual fundsexchange-traded funds and stocks. But it’s smarter to start by determining whether your overall portfolio allocation is in line with your financial goals and risk tolerance.

 Ideally, this should all be an extension of your financial plan. Even younger investors starting out should think in terms of their overall portfolio, even if it contains only a few holdings at this point. 

Find your most recent statements and organize your records. Review all monthly or quarterly documents from your investment accounts. Keep them all in a paper file or on your computer and find a way to take a consolidated, overall view of your holdings as a portfolio. I suggest categorizing your portfolio by account and by asset class on a spreadsheet. This shows you how well-diversified you are across different asset classes.

Your spreadsheet might reveal an ungainly number of individual holdings across different accounts. I call it financial clutter. This is common among folks who have a number of old 401(k)s from former employers. I had a client with almost 50 distinct holdings across multiple accounts when we started working together. This makes your portfolio hard to track and monitor efficiently. 

Consolidate your accounts. Decrease your clutter and consolidate your accounts as much as possible. Unless there is a compelling reason to leave an old 401(k) with a former employer, monitoring your portfolio is much easier if you roll the account into a consolidated individual retirement account or even your current employer’s 401(k) if allowed. Also consolidate other accounts such as IRAs, taxable accounts or annuities from various companies.

Review or create your asset allocation plan. Do this before reviewing your individual investments so your current allocation doesn’t distort your judgment. I can’t stress enough how important it is to have a financial plan in place before you decide on an asset allocation strategy. The financial plan should drive your investing activities, allocation and choice of investments. A well-constructed plan helps you focus on your risk-tolerance and your goals for the money you save and invest.

Review your current investment holdings. Did your stocks hit their sell targets? How do your mutual funds compare to their peers? Establish a monitoring process for your individual holdings, and review them against appropriate benchmarks on a regular basis. If needed, make changes as you see fit. It’s best to do this with the help of an advisor, but do-it-yourselfers can check out Morningstar.com to analyze investment holdings and compare mutual funds.

Rebalance your portfolio. After you review allocation across all of your various accounts, you can buy or sell holdings or add new investment dollars to get back in line as soon as possible to ensure that it is consistent with the risk and return targets in your financial plan.

Establish a regular process to review and monitor your portfolio. Getting your portfolio in shape just once does no good if you don’t establish a process for reviewing your portfolio and your holdings on a regular basis. This doesn’t mean looking at your investments daily or even weekly. Doing so can only make you antsy about your investments, which often leads to bad decision-making.

Monitoring and rebalancing your portfolio quarterly or semi-annually is sufficient for most investors. Revisit your portfolio allocation and tweak your financial plan annually to ensure that everything is in synch.

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Roger Wohlner, CFP, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, IL where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations, and endowments. Roger is active on both Twitter and LinkedIn. Check out Roger’s popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments, and retirement plans. He is also a regular contributor to the US News Smarter Investor Blog and has been quoted extensively in the financial press including The Wall Street Journal, Forbes, and Smart Money, Roger is a member of NAPFA, the largest professional organization for fee-only financial advisors in the country. All NAPFA Registered Advisors sign a fiduciary oath promising to act in the best interests of their clients.

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