In this month’s edition of “Money Matters,” Scott discusses making a habit of analyzing your portfolio and rebalancing it as needed to help keep investors on track to meeting their financial goals, as well as investment options to consider when rebalancing a portfolio.

Money Matters: Year-end Portfolio Review Tips Transcript

0:00:00.0 CJ: WTIP is pleased to bring you another edition of Money Matters, a monthly feature intended to help us understand more about managing our finances. Scott Oeth is a certified financial planner and adjunct professor. He works with many individuals and has taught retirement planning and wealth management strategies to hundreds of financial professionals. Scott joins us now by phone. Welcome, Scott.

0:00:24.6 Scott Oeth: Good morning, CJ.

0:00:25.5 CJ: Good morning. Nice to chat with you again. So, you said you had some year-end portfolio review tips to share with us, where do we start with that?

0:00:35.7 SO: Yeah, there's a couple of interesting ideas I'd like to cover some quick points there, think it's worth... This is a great time, we're getting towards the end of the year and some of our tax related to some investment-related, but as always, this is in general discussion, some informational type pieces, you need to do your own research and certainly seek your own expert advice to think about how they may apply to your own situation. But the first one, CJ, is pretty commonly known or at least talk about, and that's the idea of rebalancing your portfolio. Margins have moved, you may have had an investment plan, a strategy, what's called an asset allocation or your recipe or your mix for your investments at one point, and things change. And there is a very natural tendency for there to be... Get caught up in the fear and greed cycle in the markets. So when things are doing well, you want to own more of them, you want to buy more of those, and when things are going poorly, you don't want to touch them, you might even want to sell and get out of them. Well, when we're not invested, it's very easy to sit back and say, "Oh, I know that I should buy low and sell high."

0:01:42.1 SO: Everyone gets that, right? Makes sense, buy low, sell high, first rule of investing, but once you're in the game, so to speak, everyone wants to do the opposite, but re-balancing... Having a set time to do that at least once a year, is a good idea. Some people do it more frequently, there's different philosophies or techniques on that, but at least once a year, take a look and say, where does my portfolio sitting now as stocks going up and bombs going down and vice versa or different sub-categories within there. And does it make sense to bring it back to target, and by doing that, CJ, what will happen is over time, you're consistently forcing yourself to sell high and capture some of those gains from winners and buy into things that might be attractive long-term holdings, but ones that are out of favor and buying low. And so, you're really mechanically putting a time on the calendar when you sit there and say, I'm going to sell high and buy low, just like I'm supposed to, and I'm going to remove some of the emotion and so some of the market hysteria that gets wrapped up and all that. So that's a, it's a very good technique and it can over time reduce the volatility of the portfolio, which is generally a good thing, and it may even actually enhance your returns.

0:02:54.4 CJ: Okay. So, it's kind of a realignment a rebalancing and keeping your investment mix back to what you sort of initially had in mind, it's putting the guard rails on in a way, right?

0:03:09.3 SO: That's right. That's right. Yap.

0:03:09.9 CJ: Okay. So then what's next? What's the next step?

0:03:14.0 SO: Well, in taking a look a level below that. So maybe if someone's approaching retirement, they may have heard of the concept of a 60/40 portfolio, 60% stocks, 40% bonds, they may have done the research and said, "Yes, that sounds like a good all-weather mixed to carrying me through my retirement years, I'm going to look at that once a year and rebalance back to that target." All good stuff. But, CJ, as you might imagine there's a big difference in what that 60% in stocks owns, and so there's a lot you can talk about in terms of analyzing different investments or just one thing that I see, that I think is kind of put risk warning out there, and that is the difference in owning individual company stocks, you know, the names of companies that we might all be familiar with, a handful of those, and owning very broad baskets of securities. And there's some concepts that finance professors like to use those, you know, company-specific risk or the term they would use is non-systematic risk. And that's the risk that any one of those companies, even though you might think it's a great company, it might have bad earnings since a product might fall out of favor, there might be a lawsuit or a scandal or any number of situations related specifically to any one company, that's company-specific risk.

0:04:29.4 SO: There is aside from that, just broader market risk, things like the economy and bear markets, geopolitical events, and that's called systematic risk. So, you can diversify away from that company-specific risk, and there's a notion that people tend to like the idea that well-chosen companies, you know, a few well-chosen companies watch those eggs in the basket well, and that that will protect them, but when you look at history, it doesn't always really hold up that way. And so I try to encourage people for the serious money for the core of their portfolio that they don't want to screw it up. You might really want to broaden the footprint, which is the number of different companies, and a great way to do that is through something like an index fund or a broad-based fund, and that will wash out a lot of that company-specific risk. Sometimes as an example for a little drama in a meeting, CJ, I'll take a pencil, snap it. Everyone can snap pencil, right? Crack, it breaks in half, and then you take a bundle of pencils and try to break it, you can't break that bundle of pencils, and that's kind of the difference between company-specific risk and market risk.

0:05:39.7 CJ: Okay, so that makes sense. How else can we improve our investment accounts?

0:05:45.3 SO: Well, right now, we're kind of at this happy point. You know, we've had market turmoil, there's been a great readjustment with rising interest rates that put a lot of downward pressure in bonds, stock have had a bit of a rocky go, but money market accounts and bank savings, boy, they look great, we're seeing interest rates that we haven't seen in years, almost 20 years. And it can be very appealing to hold something like a money market account, there's a lot of them that are paying around 5% interest right now, and I think this is a great place for money that's earmarked for shorter term purposes, dollars that you need are very liquid, meaning we can get to them when you need them, and money that's designed to, it's a rule on having a stable type holding. So many, many good purposes for this, but I think there is a bit of a risk, which you may call an opportunity cost of having those dollars essentially on the sidelines.

0:06:39.7 SO: And if you have money that you can commit to longer term purposes, it's for longer term goals, you can afford a bit of risk, historically, after we hit a peak in interest rate rising cycles, many asset classes do very, very well, including bond holdings. They out-perform, they have outperformed, historically, money market funds. And so, my point is, well, the money market funds can look very comforting, they can look appealing, you might say, well, why would I go into something like a bond fund that has more volatility, more potential risk than a money market account when they're paying about the same rate of interest. The reason would be that historically bond funds have had also not just the interest payments, but a lift in the value of their holdings following a series of interest rate increases. So, something to consider there.

0:07:31.2 CJ: Okay. All right, so money earmarked for long-term purposes, consider getting off the sidelines into the game, anything else?

0:07:40.1 SO: Yes, yeah. One last one, CJ, and this is kind of a fun step to look at, you know, you and I in the past have talked about the ability to sell holdings in taxable accounts that have fallen in value and book what's called a taxable loss. And you can use that, that paper loss that you've accounted for to offset other gains in the portfolio, and with limited amounts generally $3,000 per year to even use that against your taxable income. So, we've talked about tax loss, that's something for people to look at and taxable accounts as we get towards the end of the year. But interestingly on the flip side, there's a strategy it isn't talked about nearly as much, and that is the ability to sell and recognize gains tax-free. We all love the sound of tax-free gains, you know?

0:08:24.3 CJ: Oh, yeah.

0:08:25.3 SO: Because I've also talked about that before, right? It sounds fantastic. So, you really want to do your homework here and get expert tax advice, but there's a threshold for taxpayers who filing singly, it's about $44,600 of taxable income or married filing jointly, $89,250 of taxable income. If you're below those levels of taxable income, you can sell assets at a gain, and that capital gain is a 0% rate. So this opportunity comes up each year, and if you fall into that year, maybe you're having a lower income year, maybe that's where you're income lives, you might really want to take a look and say, gee, are there holdings that I like, that I want to sell and book it as a zero gain, just to raise what's called my basis to a higher level, and it's essentially booking tax-free gains year-over-year. So, something... It's not going to work for everyone, but it's a strategy to consider and something you don't want to let slip by as the years go by because it could be a really nice opportunity.

0:09:27.9 CJ: All right, well, we like the idea of tax-free gains. All right.

0:09:32.2 SO: Yes, tax-free.

0:09:32.9 CJ: Absolutely. Well, Scott, thank you so much for all this information. My mind is whirling, so I'm sure that we can go to your website and sort of review all of this, right?

0:09:45.5 SO: Yeah, absolutely. Scottoeth.com, I post our sessions here just like they're also posted at WTIP site, and I have many, many other blog posts and communications that I like to put my thoughts there in terms of what I'm seeing and what we're talking about in terms of financial planning and investment strategies. So, there's a lot there, and I've been having some fun interactions with listeners by all means, send me an email or get in touch if you have a specific question. And one thing I've been doing a lot of, CJ, the last few years that's... It's really been great, is webinars on a number of these topics, where they're a longer dive. And so, folks get in touch, I can get them on the list and let them know about upcoming webinars on different financial planning topics.

0:10:26.8 CJ: All right, love it. We're talking with Scott Oeth and we'll be talking with Scott on the first Wednesday of the month on North Shore morning. If there's anything else, Scott, we're going to let you go, and thank you so much for all your information today.

0:10:41.2 SO: Thank you, CJ, I appreciate it.