Happy New Year! I hope you enjoyed the holiday season as much as I did. Time spent with family and friends over the past couple of weeks was absolutely wonderful. Sadly, with all of the get togethers and delicious food I’ve now got a few extra pounds to lug around. Oh well, it was worth it and I’m fine with trying to cut back a bit to drop them. We’ll see how long it takes!
January 1 – Review day
As we put up the new calendars, it reminded me that it’s an opportunity. An opportunity to both reflect on the past year and to resolve to make improvements going forward toward financial independence. January 1 was always my day to review our asset allocation across our portfolio. It allowed me to make tweaks to accounts as necessary to re-align the investments. It was also the time to nudge up contributions to different savings plans. Sometimes it would be our 401(k) or 403(b) contribution rates. Sometimes it would be adjusting for the new limits on our IRAs. If there was anything leftover, then it would be adjusting one of the automatic investment plans in a taxable investment accounts. In any event, there was always some adjustment to make to increase one or several of our savings accounts. The first of January worked for me as a fresh start.
As I said, I would also analyze our asset allocation for our total portfolio. First pass was to look at the very broad categories of equities, fixed income, and cash. If equity markets were particularly strong, as they were this year, I would look to reduce the equity exposure. With those proceeds, I would increase the fixed income portion of our savings. The second pass was a review of the allocation within the broad categories. Did our domestic or international equities grow or decline out of proportion? Within international holdings, what happened with emerging markets? I would look at small cap vs. large cap, growth vs. value. Over time, I would also re-access what percentage of our portfolio should be allocated to each of these investment categories.
Doesn’t take much time… really!
Now this may seem terribly time consuming, but it actually wasn’t. When I first began, we didn’t have very many accounts or investments so the model was pretty simple. The next year, as our assets grew or another savings program was introduced, the model was updated to include the new investments. For instance, as I’ve posted before we didn’t have access to a Health Savings Account until about 5 years ago. At the end of that year, I popped HSA into the model and then added the investments for the review. Each year the model became a little larger but it really didn’t take long to make the adjustments.
Afterwards, I would go online to exchange and rebalance between investments in the various accounts as necessary. I would try to do the majority of the rebalancing within the 401(k), 403(b) and IRAs. This limited any tax consequences. Over time, it became easier to complete. Many of the accounts offered an automatic rebalance feature. As they become available, I would set up to execute at the end of the year.
What can happen if you don’t review
If you don’t review at least occasionally, you may create an exposure in your asset allocation. That exposure may conflict with your risk tolerance. For example, perhaps you are comfortable with a 60/40 split between equities and fixed income. After a year like 2019 you could end up with a 64.5/35.5 allocation due to the run up in the equity markets. While a 4.5% shift may not seem like much, it puts more of your assets at risk. That means more risk if there is a downturn in the markets going forward. Below is a chart showing the shift in asset allocation for various equity – fixed income splits. I’ve used the S&P 500 and Bloomberg Barclays US Aggregate returns in 2019 as proxies:
Note that the closer to the 50/50 split is where the drift is the highest. As you approach the extremes (90/10 or 10/90) the risk is somewhat diminished. That’s not to say you can ignore the risk. It can compound over several years as the last decade illustrates. Consider an investor who had an allocation of 70/30 at the beginning of 2010. Without any adjustments they would have ended the decade with an allocation closer to 85/15. That’s a 21% increase in equity exposure. Approaching financial independence and retirement, that may not be the allocation desired should the market go in the opposite direction.
Develop your own systematic review
It’s a system that worked well for me. I encourage you to develop one for yourself if you’re not already doing it. Reserve a specific date on your calendar to review your portfolio and re-access your asset allocation. I know some folks do it much more frequently than annually (quarterly or even monthly). For me, once a year was just fine. I found that even quarterly, our investments didn’t drift enough to merit a full portfolio review and rebalance.
Don’t leave money on the table
Shifting gears, year-end is also a great time to review your benefit plans. Make sure you’re not leaving money on the table. Did you fund a Flexible Spending Account (FSA) last year? Take the time to gather any receipts and submit for reimbursement before your plan’s deadline. In addition, many plans allow a roll over into the new year of some of the unused balances for a limited time. Perhaps your plan falls into that category and you have a balance remaining. Use it before it gets forfeited.
Another benefit that is often overlooked is re-imbursement for gym and weight loss programs. If you belonged to a gym or a weight loss program during 2019, check with your Benefits Representative at work or call your medical insurance plan. They may offer a reimbursement for your participation. For us, we were able to get a check for up to $300 each year to offset our expenses. It makes sense too. If you’re losing weight and exercising, then hopefully you’re getting healthier. That translates into not needing to go to the doctor as often. It’s a great feature of medical plans that many people are unaware of. Don’t let that be you… get your reimbursement!
Do you have an investment review process that you’d like to share? Or, are there other year-end re-imbursements you take advantage of? Let us know in the comments below.
Thanks for stopping by.
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