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One Way to Improve Your Investing--and Your Vacation

The case for doing your year-end investment review now.

Gregg Wolper, 11/10/2010

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For those of us who feel as if 2010 began just a few weeks ago, it's hard to believe the end of the year is approaching. But the calendar doesn't lie. Many investors view late December or early January as the ideal time to take a broad look at their finances as part of an annual or semiannual review. That's a good idea in a way--it's preferable to ignoring your investments--but here's a better one: Do it now.

Why? Mainly because the period from mid-December through the first part of January is typically the most hectic and exhausting time of the year--even if it supposedly includes a vacation.

Vowing to review your investments in the year's final weeks might sound reasonable in theory. But in practice, you're likely to be scrambling to find last-minute gifts, dealing with children or grandchildren unencumbered by school, rushing to finish final work projects, and planning and packing for vacations. Perhaps by the time your investment review comes up on your schedule, you'll already be off to some destination where the exact percentages of your 401(k) allocations are, to put it mildly, not at the top of your mind.

Those aren't the only reasons to consider moving up the timing. With the midterm elections now over and the Republicans having made broad gains, media outlets are brimming with debates and explanations about the potential effects on financial institutions, tax laws, and individual investments. While it's helpful to be wary about advice to make substantial changes in your portfolio based on election results, all the discussions about tax policies and other issues do contain helpful information along with the speculation. At the very least, the current wealth of talk about such matters can focus your attention on topics that may be far from your thoughts in a month or two.

Taking the Stress Out of Tax-Loss Decisions
Any evaluation of your investments would benefit from having more time to do it. For example, one of the most popular actions to take at the end of the year is tax-loss selling. But such decisions aren't simple. First, you have to decide whether or not to take the losses (if you have them). If so, you have to decide where to put the proceeds. Will you simply leave the money in a checking account for 31 days and then buy the same fund (or stock) again? Or will you immediately transfer the proceeds to a similar holding, or an index fund, in order not to miss out on any gains that might occur in the next month? If you decide on the latter course, what should you buy? You could end up having to make three or four separate decisions just to take one tax loss.

This is not meant to scare you. These decisions are not overly complex. In fact, to investment aficionados--a description that fits many of this site's readers--this process will even be enjoyable. But the process does take some time.

Rebalance and Review at Your Leisure
The same tenet applies to the entire year-end review. Before you can rebalance your allocations, you have to find out how far the percentages have strayed from your targets (if you have them) and then decide whether those discrepancies are wide enough to merit taking action. At the same time, you must decide if your target allocations still meet your needs. Although target allocations shouldn't be changed too often--that would defeat the purpose of having a target--it won't do to simply keep the same numbers forever without even considering if they remain appropriate.

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