It’s the new year — here are 5 things to consider when reviewing your investment portfolio

Despite 2020 being one of the seemingly longest and most stressful years in recent memory, to the surprise of many, it was a rather positive year for both the stock and bond markets when looking at overall annual performance. Many investors likely saw their investment accounts get a nice bump and will be feeling good after getting their year-end statements. However, when reviewing the year as a whole, you know that 2020 was anything but a “smooth and steady” year, and there were many lessons we can take into 2021.

As we all look to make our New Year’s resolutions and reflect on ways we can improve, January is as good a time as any to review your investment portfolio.

Similar to your annual “check up” with your doctor, it’s important to review how you’re invested, what went well and what could have gone better in the past year, and then determine what the best course of action going forward is.

Of course, it helps to know how to get started reviewing your portfolio and what, exactly, you should be looking at. That’s why we’ve put together this list of five things to consider when reviewing your portfolio:

1. Review your goals

While it may seem basic, this is perhaps the most important consideration. Remember that we are all investing for a reason, and it’s vital that we re-evaluate and define those reasons, as circumstances can quickly change from one year to the next.

For example, if you’re investing to meet your future retirement needs, has your targeted retirement date changed over the past year? Whether that date has moved up or down, it may require you to make adjustments to your portfolio.

Other people may have been laid off from their job in 2020 and now need to supplement lost income, which puts long-term goals on the backburner in favor of short-term liquidity.

Once you define your goals and determine how they may have changed, you’re better positioned to make changes to your portfolio if necessary.

2. Review your asset allocation

Asset allocation is the ratio of stocks to bonds you’re invested in. Investing in stocks typically brings more risk and volatility than investing in bonds, which makes your asset allocation a critical part of your long-term investment strategy.

So, what is the proper asset allocation for your portfolio? The answer is different for everyone and varies based on things such as your goals, the time horizon of when you’ll need funds and your individual tolerance for risk. For example, a young investor with a long-time horizon to retirement and high tolerance for risk will likely have a much different asset allocation than an investor who is currently in retirement, accessing the funds annually, and has a low tolerance for risk.

If you’re not quite sure where your risk tolerance lies or what your asset allocation should be, consider talking to a financial advisor for help. Determining risk tolerance requires being completely open and transparent with yourself to understand what you’re truly comfortable with. It takes an understanding that just because one person may be invested a certain way, it doesn’t mean that’s the right way for you. A trusted financial advisor can help you take a step back and look at the full picture of your financial life, offering a valuable perspective that can keep you grounded while taking into account your comfort level with risk and long-term goals.

Once you understand your risk tolerance and what types of asset allocations are ideal to help you meet your goals, you will be better positioned to make any necessary adjustments to your portfolio.

3. Review your level of diversification

Alongside asset allocation sits diversification. You could have the proper asset allocation, but if you’re invested in only a handful of stocks, you may not be very well diversified and could be exposing yourself to an amount of risk you cannot, or should not, be exposed to.

While it can be tempting to hold more popular names in the market, especially when they’re doing well, investors have to be careful not to look at past returns as an indicator of future performance. Once stocks get into the top 10, they don’t always stay there. Plus, it’s not just the big names that can move the needle on your portfolio. Less publicized asset classes such as small cap stocks and emerging market stocks can also play an important role in a well-diversified portfolio — improving long-term performance while lowering the risk of your overall portfolio.

Review your portfolio’s diversification and make sure you are broadly diversified among different asset classes. Missing out on just a small percentage of the top-performing stocks each year has shown to significantly hurt investors’ returns, and broad diversification can better position your portfolio to weather various types of market conditions.

4. Review your tax efficiency

Do you know what the tax consequences are of the different investments you hold? Effective tax-management of your portfolio can improve your after-tax return.

Generally, you won’t have to worry about tax implications of investments held in tax-deferred accounts like a 401(k) or IRA until you start taking distributions, but investments held in a taxable account like an individual or joint account will have tax implications. January is a great time to analyze your year-end statements and 1099s to review what the tax implications of your investments were. For example, what was the income paid out on your investments that you now owe taxes on for 2020? Did you have any realized gains or losses for the year?

After reviewing this, reflect on whether you could have done anything differently to improve your after-tax outcome, such as holding more investments in tax-efficient vehicles, like ETFs or tax-managed mutual funds. For those in higher tax brackets with an allocation towards bonds, consider allocating a portion of your portfolio to municipal bond holdings, which pay income exempt from federal taxes.

Tax loss harvesting plays an important role in tax efficiency, too. While 2020 didn’t give investors the smoothest ride, it provided plenty of opportunities to tax loss harvest throughout the year.

If you didn’t tax loss harvest in 2020, this is a strategy that you should seriously consider in 2021 and future years.

5. Review your fees

Fees come from quite a few places — and they add up.

While it varies by institution, you’ll generally be paying any management fees, account or administrative fees and investment holding or expense ratio fees. Also, be wary of any front-end or back-end “sales loads” or commissions if you are getting into or out of investments.

It’s important to understand the fees you are paying and the services you are getting for those fees. If you’re unsure, ask your service provider or financial advisor for this information.

For example, do you know the expense ratio on your different investment holdings? You’ll want to review and make sure your investments have low operating expense ratios. If they don’t, talk to your financial advisor about what better, lower-cost options may be available to you. There are plenty to choose from.

Get started with your investment portfolio review

Having a good grasp of your investments goes a long way to feeling more confident in them. And a trusted financial advisor can help boost that confidence by helping you set your financial journey’s ultimate destination, along with everywhere you need to stop for gas along the way.

Whether you’re looking for comprehensive financial planning services or a more hands-on, tech-savvy approach to investing, we can help. At Wipfli Financial, we offer traditional investment advisory and financial planning services as well as a new, tech-forward service called Avid, where you’re empowered with direct access to modify your investment account online while still working with an advisor to plan and track your progress toward your financial goals. Click here to learn more.

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5 things to consider when reviewing your investment portfolio

Wipfli Financial Advisors, LLC (“Wipfli Financial”) is an investment advisor registered with the U.S. Securities and Exchange Commission (SEC); however, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. Wipfli Financial is a proud affiliate of Wipfli LLP, a national accounting and consulting firm. Information pertaining to Wipfli Financial’s management, operations, services, fees and conflicts of interest is set forth in Wipfli Financial’s current Form ADV Part 2A brochure and Form CRS, copies of which are available from Wipfli Financial upon request at no cost or at Wipfli Financial does not provide tax, accounting or legal services. The views expressed by the author are the author’s alone and do not necessarily represent the views of Wipfli Financial or its affiliates. The information contained in any third-party resource cited herein is not owned or controlled by Wipfli Financial, and Wipfli Financial does not guarantee the accuracy or reliability of any information that may be found in such resources. Links to any third-party resource are provided as a courtesy for reference only and are not intended to be, and do not act as, an endorsement by Wipfli Financial of the third party or any of its content or use of its content. The standard information provided in this blog is for general purposes only and should not be construed as, or used as a substitute for, financial, investment or other professional advice. If you have questions regarding your financial situation, you should consult your financial planner, investment advisor, attorney or other professional.
Cole Gustke

Financial Advisor

Cole Gustke is an Financial Advisor with Wipfli Financial Advisors, based in Wausau, WI. He works collaboratively with a team of financial advisors to provide comprehensive financial planning and investment advisory solutions to individuals, families, small businesses and retirement plans.

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It’s the new year — here are 5 things to consider when reviewing your investment portfolio

time to read: 5 min