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Wall Street Steward Blog

Scrooge's Financial To-Do List

As we enter the holiday season, many investors tend to neglect their investment portfolios.  There are so many things to worry about already.  If your holiday season looks like ours, it can be summarized by this run-on sentence:  Thanksgiving Dinner, family in town, the annoying in-laws, Christmas shopping, decorating the house, reading “Twas the Night Before Christmas” to our little ones….Christmas is gone.  Time to break out the bubbly and kiss the one you love as they scream “HAPPY NEW YEAR” while you ponder how long that resolution will hold. 

I digress. 

Needless to say, the LAST thing on most peoples’ minds is completing their year-end financial to-do list.  This is understandable, but if now is not the right time to turn the proverbial financial head and cough, WHEN IS

There will never be enough free time for most people to do these things.  It is very b o r i n g to think about, but very necessary to do, and because of that, I decided to do the work for you!  I present to you the “CliffsNotes” of a typical financial check-up…broken up into Tax, Budgeting, and Investment chapters.  Enjoy!

EVALUATE YOUR TAX SITUATION
I don’t give tax advice, am not a tax advisor, and suggest that you discuss your specific tax issues with a qualified tax advisor.  That being said, there are several tax issues that I recommend every investor pay attention to. 

Take your losses.  If you currently have losing investments that are NOT in a retirement account, they should likely be realized.  Sell the losers.  Currently, taxpayers are allowed to net all losses against investment gains, and can even write-off up to $3,000 per year on their tax return.  If the losses are more than $3,000, the remainder can be carried forward and used in future years.  However, please make sure you do not repurchase the investment (or a substantially identical investment) for at least 30 days after the sale, as this would violate the IRS “wash sale” rule. 

Check annual income brackets.  If you are currently pushing up against the next marginal income tax bracket, then it makes sense to defer that annual bonus until January, or to participate in other tax savings ideas like stock option plans, etc.  If, however, you have plenty of room inside your marginal bracket but have reason to believe that next year you will be in a higher bracket, then take some extra money now.  That could be a retiree withdrawing an extra $5,000 out of an IRA, or someone deciding now is the time to take a profit on that piece of rare artwork.  Every situation is different, but check where you stand BEFORE the end of the year so that you can make prudent decisions regarding gains, losses, and income.

CPA report card.  Are you completely happy with your CPA?  Did they charge you an abnormally high rate last year?  Now is the time to consider making a change if one needs to be made.  CPAs are absolutely swamped during tax season (January 1st – April 15th), and are less likely to take on new clients during that time of the year.  If you are completely happy, wonderful….if not, carpe diem.  

BASIC BUDGETING
Budgeting is not a fun exercise for most people.  Most of us, including me, would rather just earn what we can, keep spending low, and let the chips fall where they may.  If you do choose to submit yourself to the punishment that is reviewing your family budget, here are some steps:

Trim the fat.  Nearly every family has a few places where their budget bucket is leaking money.  Whether it be paying $50/month for that gym membership that you used twice this year, or paying a yard service to groom your Afghani-looking backyard.  Perhaps that cable package could be reduced, or your cell phone deal renegotiated.  Remember that every little bit helps, especially in this economic age.  Only you know what your family’s budget includes and which items are non-negotiables, but chances are there is some fat that could be trimmed out.

Credit card research.  In a perfect world, everyone would have a credit card (to get airline points and to boost credit score), but nobody would carry a credit card balance.  In reality, very few people are in the financial position to NOT have a monthly interest charge from Visa or Mastercard.  Having a balance does not mean you cannot prudently view the new offers you receive, and compare them to your current card.  “Interest free until 2013” sounds pretty good on that leftover Christmas spending bill of $3,000.  Look for lower annual fees, lower rates, or better rewards programs and then call your current credit card company and hold their feet to the fire.  You could be surprised at how much they want to keep your business. 

INVESTMENTS
You knew it was coming, right?  After all, I make my living talking to people about investments, so I figured it had to be included in this article.  Here we go….

Investment fees.  Do you know every single fee that you pay on your investments?  Based on my 17 years of experience, only a small percentage of investors know all of the fees they are paying.  The only way one can know if they are getting the value that they are paying for is to find out WHAT they are paying.  Many times these fees can be reduced, or in some cases, eliminated.  If you are using an advisor, cutting our own fees is not high on our priority list, but it should be high on yours.  Also, many times the nickel-dime account maintenance fees can be eliminated by consolidating accounts.  Speaking of that….

Simplify your accounts.  There is absolutely no reason for someone to have 5-6 retirement accounts spread all across town.  Even though people justify this as “not having all of their eggs in one basket,” it is a bad idea for many reasons.  You may reduce fees and prevent portfolio overlap by choosing 1-2 advisors and putting all of your money with them.  Just because you have the money with one person or institution does not mean that you are not diversified.  Clean them up.  You will be happier and so will your advisor.

Make retirement contributions.  Even though you have until April 15, 2012 to make 2011 contributions to your IRA/Roth IRA (and most other retirement accounts), I would NOT wait until the deadline to fund these.  By funding these accounts before the inevitable Christmas spending spree, (1)you make sure that it happens, and (2)most will put more money in, which will benefit them at retirement.  Is it harder to get an investor to fully fund his IRA in February after they have spent money on Thanksgiving turkey, Christmas presents, New Year’s Eve events, and a January anniversary (love you honey!).  Fund it while you have it.

Review and Rebalance.  Now is the time to sit down with your advisor and look at every holding you own.  Think of this as looking over your child’s report card – when it reads A, A, B, and D…which one would you like to discuss?  Let us explain to you which investments are doing well, which ones are not, and what (if any) changes need to be made.  This should include re-visiting the risk tolerance conversation, and rebalancing your account to reflect your current risk tolerance.  Risk tolerance is a moving target, and we should adjust your portfolio accordingly.

I hope this information is both helpful and motivating.  There will never be enough time in your day to spend hours thinking about your financial picture, but these ideas should give you a good starting point. 

Important Disclosures:
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.