Plenty of people subscribe to the “set it and forget it” mentality when it comes to investing - depositing a bunch of money in their 401k (among other accounts) and stepping away to let the stock market work its magic. And while the hands-off approach is one of the more appealing aspects of investing, there are benefits to checking up on your portfolio, whether that’s once every few months or only once a year.
A portfolio check-up includes looking at your investment goals, your risk tolerance, your time horizons per each investment, and how you are situated financially.
When you’re checking on your portfolio, there are a few tips to keep in mind that will help you make appropriate adjustments and end up maximizing your profits in the long run. Here are some top tips for portfolio checkups.
1. Check How Your Goals Are Aligned With Your Investment Journey
One way to check up on your investment goals is by using the SMART acronym. This means your goals are
Specific: Calculate your specific FIRE number.
Measurable: this will give you a measure of how far away you are from achieving financial independence.
Achievable: Is your goal achievable? If your expected annual expenses are based on your current budget, it should be.
Relevant: Take a look at your current situation. Is your FIRE number still relevant to your current situation? Will you still be living in the same way when you reach retirement?
Time-Based: How much time will it take to reach your FIRE goals based on these investments and their annual returns?
These are all vital things to consider when checking up on your investment portfolio and your FIRE goals. Using SMART is a good way to ensure you’re keeping up with your goals.
2. Reconsider Your Asset Allocations
It’s important to look at the asset allocations in your portfolio and consider whether you need to rebalance them. Your initial asset allocations relate to your current risk tolerance, but over time the stock market changes, and your asset allocations can shift. A big shift in the market can lead to your allocations being misaligned with your risk tolerance.
Rebalancing is an important part of investing for FIRE as it helps you to minimize risk and optimize returns, particularly as your portfolio grows and your allocations change. It is one of the primary reasons why the “set it and forget it” mentality isn’t always going to work.
Note: Don’t rebalance your portfolio too often. If you are rebalancing every other week or month, ask yourself whether you’re actually trying to play the market ie market timing. Give your portfolio time to work its magic.
3. Check Your Portfolio Performance
Gauging the performance of your portfolio can be confusing for some, so here’s a useful tip. Compare the performance of your portfolio to the average returns of the total stock market. If your portfolio isn’t doing as well as the stock market, this is a sign that you probably want to make some adjustments.
There could be many problems: you may be practicing market timing by jumping in and out of stocks and losing money, or fees might be dragging down your portfolio. It’s up to you to dig deep and figure out what’s going wrong so you can make the necessary changes.
Things to consider:
Are your actions (market timing etc) causing problems?
Are your brokerage fees too high?
Are you picking bad investments?
Are you being aggressive enough with your investments?
This last one is particularly true. You may need to be more aggressive with your allocations between stocks and bonds. For more in-depth info on stocks, bonds, and specific allocations that work best for you, consider taking our stock investing course.
4. Make Sure Your Investing Strategy Is Tax-Efficient
When it comes to investing, taxes are an enormous expense. The less money you are taxed on the more money you are able to grow. It’s important to take a look at your stock portfolios, your tax-advantaged accounts (such as 401ks, Roth IRAs, HSAs), and your non-tax advantaged accounts.
Some investments, such as certain stocks, ETFs, and REITs will be more tax-optimized when put in specific accounts. You want to take a look at each of your investment accounts and make sure your investments are appropriately tax-optimized.
One thing to keep in mind while doing this is that tax laws are constantly changing, and when these changes are made it can increase the number of contributions you are allowed to make to tax-advantaged accounts, so make sure you’re always increasing your contributions to the maximum amount when possible.
5. Look At The Fees Associated With Your Investments
When you invest in the stock market it can feel like you’re constantly being bombarded with fees. But the truth is that you don’t have to pay all of them! Here are some fees you should keep an eye on:
The commissions you pay to trade stocks
The fees for the brokerage you are trading with
Expense ratios on your ETFs and index funds (there are plenty with no expense ratios out there)
Management and advisory fees
All of these fees can add up, but some of them may not be necessary. For example, if you are paying someone to manage your account, reconsider if it’s really necessary and whether you are able to start making these investment decisions yourself. You’ll save yourself a lot of money in the long run, and will end up with extra cash to put back into your investments.
6. Make Sure Your Beneficiaries Are Properly Identified
If you haven’t yet identified the beneficiaries of your account, or your situation has changed since you last identified them, it’s worth making those adjustments now. If you’ve had children, or gone through a divorce, it’s a simple but important thing you can do to ensure your investments will fall into the right hands if anything happens to you.
The great thing about these tips is that they are actionable - you can do them all in one day, and transfer the potential of your investment portfolios overnight!
If you’re pursuing financial independence, investing in the stock market is essential. And if you follow the tips above, you’re going to get a little better at investing every day, which will move you even closer to your FIRE goals.