Good or poor performance of one or more components of your portfolio can provide a drastic change in the allocation of your assets and create dangerous imbalances that result in inadvertent risk-taking. As a result, your financial advisor will recommend regular checkups. Don’t wait for spring; why not do it now?
The first step your financial advisor will take is to evaluate your portfolio. Do your actual investments match up to your target investments? If they do, your portfolio is in good shape. But if they’re off, your financial advisor will want to determine how far off they are. He or she might not recommend altering your asset mix unless the discrepancy is significant, but every situation differs.
If your portfolio is seriously off balance, your financial advisor may rebalance it. After all, the ultimate goal is to keep your portfolio’s overall risk level under control. To do that, he or she may shift funds out of the asset class that exceeds its target into other investments, add funds to the asset class that falls below its target percentage, or direct dividends from the asset class that exceeds its target into the ones that are below their targets.
Your advisor may also want to determine if the investments in each asset class are still appropriate. That doesn’t mean he or she will recommend selling poorly performing investments and adding investments that may deliver better performance; they may be doing just fine for the type of investments they are.
Despite market volatility, 2015 was a good year for many investors.
As a result, you may find that the start of a new year is a good time to get together with your financial advisor to review your investments and make any necessary changes.
Here are five questions to ask your advisor to help you start 2016 off right:
- How can I make capital gains long term? The tax rate on long-term capital gains is lower than the tax rate on short-term capital gains, so your advisor may suggest you wait until you’ve held certain appreciated investments for a year before selling them.
- Should I own more stocks? Stocks have more appreciation potential than bonds, but there are a variety of risks associated with investing in them; your advisor, who knows your situation, can help you decide if you can tolerate these risks before making an investment decision.
- Should I contribute more to tax-deferred accounts? If you’re not yet retired, tax-deferred savings accounts are a great way to keep your assets growing tax free, potentially compounding their value year after year. Ask your advisor how best to participate; for example, by increasing your contributions to a company-sponsored retirement plan, a SEP IRA, a traditional IRA, or a Roth IRA.
- Would giving the gift of stock or mutual fund shares benefit me? If your portfolio has appreciated and you don’t need the money, your advisor can explain some options. For example, you may want to consider gifting appreciated assets to charitable organizations, your children, or your grandchildren.
- Am I subject to the alternative minimum tax (AMT)? The AMT applies to all people who take relatively large deductions, including deductions for state and local taxes. Ask your advisor if you are subject to it, and if so, he or she can help you plan ahead during the year to minimize your exposure.