As the calendar marches toward the final quarter of the year, there are certain financial rituals many astute investors embrace. They routinely scour their portfolios for gains or losses to harvest, see that their allocations align with their expectations and plan for ways to reduce the income taxes they’ll pay.
These are all good practices, but this year I’m going to ask you to expand the scope of your year-end ritual to include other important matters that are commonly ignored.
Start with a recap of the past year. Look at income and expenses, and compare that to where you expected to be. Did you earn and save as planned? Did you minimize debt? Overall did your cash flow in the current year align with you need to accomplish your life’s objectives?
Compare last year’s forecasts to where you stand today. What changes are required to get back on track? Forecasting over long periods of time is likely inaccurate if not reviewed and updated regularly. Annually examining your assumptions vs your actual in your financial forecasts can help correct course with minor modifications.
Scan through your portfolio for any significant concentration risk. Concentration risk is when one or more investments occupy too much space in the whole portfolio. How much is too much is up for debate, however, many experts feel that any more than 10% of your portfolio in any one holding may be it. Some people have concentrated positions because they’re afraid of paying taxes on the gain. If that same position were to suffer dramatic losses, many wish they sold and paid the tax to salvage some of the value. Consider selling some of the concentrated position, particularly if you’re in a low tax bracket.
Review your insurance policies. Are you amply covered for any perils that may possibly occur? Maybe there are new matters in your life like a teen driver or an inherited house that you own with your siblings.
Look at your wills and trusts. Do the executors, guardians and inheritance provisions still make sense given the family circumstances? Perhaps there have been marriages, deaths or new additions that you’d like to include. I’m amazed at how many people haven’t dusted off these documents in years.
For most, a skilled professional’s guidance is beneficial. In fact, if you have a financial planner in your life and these matters haven’t been examined at least yearly, shop for a new planner. On the other hand, if you always do these reviews yourself – you may be consistently overlooking the same things.