A Look at Your Financial Life: An Annual (At Least!) Ritual

  • By Carrie Schwab-Pomerantz, CFP®, President, Charles Schwab Foundation; Senior Vice President, Schwab Community Services, Charles Schwab & Co., Inc.
  • April 30, 2013


Dear Carrie,

I'm not an active trader, so a few years back (I'm 53 now) I built a retirement portfolio using ETFs and index funds. I haven't changed anything since, and in the meantime, I’ve gotten divorced and my son has headed off to college. I've also got a regular brokerage account, mostly index funds and ETFs. One of my 2012 resolutions is to re-examine my financial picture, but what am I looking for? What should I be thinking of?

—A Reader


Dear Reader,

Your resolution is, so to speak, right on the money. Whether you're a buy-and-hold investor or an active trader, taking a regular, objective look at your portfolio and your investment strategy is a great idea—at least once a year or whenever a major life change occurs. While you're at it, make sure the other components of your financial life are in order, too.

With respect to your portfolio, everything starts with asset allocation: the mix of investments—stocks, bonds, and cash—that fits your time horizon, your investment objectives, and your tolerance for risk. Much of the time, you'll simply need to rebalance to bring the percentages back in line with your target; sometimes, you'll want to make directional changes and reallocate.

Rebalancing: Minor Maintenance

Let's say you constructed your retirement portfolio so that you had a fairly typical allocation for a 50 year old, something like 60 percent in stocks, 35 percent in bonds, and 5 percent in cash. But now you realize that the equity portion has declined, so much so that it now represents only 50 percent of your assets, while the fixed income portion has grown to about 45 percent of your portfolio, and the percentage of cash has remained the same.

It's nice that your bonds have increased in value, but with less invested in stocks, you don't have the same potential for growth. To get back on track, you should sell some bonds and buy more stocks. One reasonable rule of thumb: Rebalance whenever one of your target percentages changes by five percent or more. Although nothing can provide absolute protection against losses or guarantee that you will meet your goals, rebalancing is an important part of staying on track.

Reallocation: Major Remodel

Sometimes, however, a change in your circumstances could necessitate a more fundamental change. If rebalancing is akin to home maintenance, reallocating is like a remodel. If you're within a few years of retirement, for example, you might want to reduce your exposure to stocks. Or imagine someone who is retiring this year and will be dependent on his or her retirement portfolio for income—that could well involve an even more extensive shift.

How to Do It

Theoretically, rebalancing and reallocating are straightforward. But it can be difficult to really understand what you own and what you should change, particularly for investors who favor funds over individual stocks. Some equity funds, for example, might own a fair amount of cash (for redemptions or to take advantage of buying opportunities). Counting such a fund as 100 percent equity would skew your actual asset allocation.

It's also important to make sure that you are diversified within each investment class. So when you're looking at your stocks, for example, make sure that you're spread across different sectors (for example, health care or financials), industries (such as drugs or insurance), and sizes (small and large companies). It's also important to own both domestic and international companies. You'll want similar diversification within your fixed-income investments. Once again, although nothing can provide you with complete protection, diversification is a key tool in minimizing risk.

Many investors like to work with a good financial advisor for rebalancing or reallocating. An advisor can easily run the numbers and tell you exactly what your exposures add up to. An advisor can also help you identify suitable candidates to buy and sell.

The Rest of Your Financial Life

It's worth pointing out that your two life-changing events—getting divorced and sending your son off to college—may not have huge implications for your retirement portfolio. But those kinds of changes should prompt you to review the rest of your portfolio and your financial life.

Your non-retirement portfolio, for example, may need some adjustment given your new financial realities. If, for example, you’re facing big tuition bills for the next couple of years, you may want that money in something liquid and safe like CDs, not equities. Or if you have less of a cushion as a single person, make sure you stay on top of your budget.

Now is also a good time to review a few perennially important questions: Do you have an adequate emergency fund? Do you have adequate insurance for your property, health, and life? Have you named the appropriate beneficiaries for your financial accounts? Is your will up to date?

For most people, this kind of financial check-up should be an annual event, done either at the beginning of the year or, if you want or need to do some tax planning, at the end of the year. But don’t be bound by the calendar: Take a fresh look at your financial picture whenever life takes you in a different direction, as yours has in the past two years. You will almost certainly find opportunities to improve your financial health, which will give you even more confidence as your life continues to evolve.




The information provided here is for general informational purposes only and is not intended to be a substitute for specific individualized tax, legal or investment planning advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.

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