New Year, New Opportunities: A Checklist for Investors to Review and Improve Their Portfolio
The start of a new year is an excellent time for investors to review their financial goals and ensure they're on track to achieve them. Here are ten things investors should consider doing as we enter 2023:
- Review your financial goals: Take some time to think about your goals over the next 12 months. Are you saving for a down payment on a house, for retirement, or a child's education? Make sure you contribute enough to your investment portfolio to meet long-term goals.
- Assess your risk tolerance: As you review your goals, consider how much risk you're willing to take on. For example, if you're nearing retirement, you may want to scale down your portfolio’s overall risk and focus more on preserving your capital. It’s even more critical this year as there have been significant market changes that have likely caused shifts in your previous allocations. For example, if you have divided your portfolio equally between tech stocks and bonds, this year would have seen the equities lose much more than bonds, meaning that now bonds would comprise a larger share of your overall portfolio. With this shift, your portfolio risk is lower than you probably want. Unsure about your risk preference? Take our risk profile assessment to ensure it aligns with your goals.
- Rebalance your portfolio: Consider reviewing your portfolio throughout the year to account for changes in macroeconomic factors that can lead to an imbalanced portfolio and lower risk-adjusted returns. Think of this as a “portfolio health checkup” by scheduling monthly or quarterly check-ins where you can review your exposures and assess the big-picture economic outlook. Using PortfolioPilot is a simple way to see all of your assets in one place and get recommendations on where to make improvements. If you're looking for assistance in executing rebalancing trades, check out our partner Passiv to automate this rebalancing for you.
- Check your diversification: Instead of naively investing across as many sectors as possible to get diversification, look at it from the perspective of measuring your actual exposure to the underlying drivers of your portfolio. Balancing them in a calculated fashion will allow you to insulate yourself more deeply from specific risks. For example, you would have saved a lot of money if your portfolio was neutral to inflation and market liquidity over the last year.
- Review your investment fees: According to a FINRA survey, 21% of investors don’t think they pay investing-related fees. Unfortunately, almost all investing comes with fees, especially if you own funds (both mutual funds and ETFs) or trade regularly. According to Morningstar, investors paid an average 0.40% fee for mutual and exchange-traded funds in 2021.
To put this into context, the SEC has an example demonstrating the long-term dollar impact of investing fees. The example assumes a $100,000 initial investment earning 4% a year for 20 years. An investor who pays a 0.25% annual fee versus one paying 1% a year would have roughly $30,000 more after two decades: $208,000 versus $179,000. You can easily compare ETFs with TD Ameritrade's ETF comparison tool.
- Keep an eye on taxes: Though it’s far from thinking about next year’s tax bill, it’s not a bad idea to start thinking about ways to take advantage of tax-loss harvesting throughout the year. If you make any large trades, consider harvesting a portion of them now so you have to do less work at the end of the year. New to tax-loss harvesting? Check out our YouTube recorded session on what it is and how you can take advantage of it using the free PortfolioPilot tax-loss harvesting feature. Tax-loss harvesting can save you thousands on your tax bill.
- Shelter money from taxes: In addition to using tax-loss harvesting to save on your tax bill, take advantage of tax-free investment accounts such as your company’s retirement account (e.g., 401k in the U.S. and RRSPs in Canada) and maxing out contributions to your individual retirement account (e.g., IRA in U.S. and TFSA in Canada). Both the U.S. and Canada increased the max contributions, so make sure you account for that.
- Be Mindful of financial news overload: It’s easy to be drawn in by sensationalist news and rumors, but staying abreast of the big picture, such as macroeconomic drivers and trends, is the most direct way of understanding the shifts in your portfolio. News clickbait and social media conversations might make it seem doom and gloom when it’s not necessarily the case.
- Holistically look at your net worth: You probably have more risks and exposures than just your investment accounts. Zoom out beyond your traditional investments and look at your real estate, stock options, crypto, and other assets and liabilities. To better understand your overall risk, it’s essential to look at the entirety of your assets to evaluate the full range of potential outcomes.
- Get unbiased, expert recommendations: Unsure about the health of your portfolio? Check out PortfolioPilot, our free intelligent portfolio management tool for self-directed investors. Get a quick read on the strength of your portfolio with our Portfolio Score and get suggestions on ways to improve your portfolio by leveraging Global Predictions Recommendation Engine. Sign up for free at PortfolioPilot.com.
By following these steps at the beginning of the year, you can ensure your investment portfolio is in line with your goals and risk tolerance while also being tax-efficient and diversified. Staying informed and regularly accessing your investments throughout the year is crucial to ensure they align with your financial goals. Not only to help you achieve your goals but also to make you a more confident investor.
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