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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.

Besides the rebalancing issue, a thorough review also includes evaluating the individual holdings in your portfolio, to see if they still offer what they did when you bought them. For mutual funds, several questions would arise. For example, does your small-cap fund still own small caps? Are all the managers to whom you entrusted your money still in the same roles at the same funds?

Much better to do such research during the next few weeks, rather than trying to wedge it in during or just after the holiday season, when too many other priorities are competing for your time. If you feel rushed during your portfolio review, you may make poorly considered changes, or conversely, stick with the status quo simply out of inertia and exhaustion rather than logic.

Won't You Be More Fully Armed Later On?
But wait a second, you might say. If these decisions are so critical, why not wait until year-end, when more information will be available? Because in reality, little information of importance will arrive between now and the new year. Although some mutual funds end their fiscal years on Oct. 31, the funds whose fiscal years end in June or December--the majority, I'd venture to guess--won't be releasing their new annual or semiannual reports (which contain updated expense ratios and portfolios, new shareholder letters, and more) until February or March 2011.

In the meantime, if you want to check basic facts about a fund's allocations or its top-10 holdings and see who the manager is, typically you can find that information at any time on the fund's website, updated monthly or quarterly. In short, you likely know as much about your funds now as you will in middle or late December, or even in January.

True, by doing your investment review now, you won't be able to examine full-year performance and ranking figures for 2010. But it's hard to argue that such numbers are necessary for your purposes. After all, calendar years are arbitrary periods to measure mutual fund performance. The trailing 12-month period through the end of October is no more or less useful than performance for the official calendar year. More importantly, a decision that might be altered by six weeks of performance one way or the other probably isn't a decision grounded in solid reasoning. It's more helpful to focus on longer-term numbers that aren't as affected by a brief stretch of returns.

So, get out the laptop, the spreadsheets, or the manila folders and get started. Look at the bright side: You'll not only make better, more carefully considered decisions, you'll also be more relaxed over the holidays, knowing that this important task is out of the way.

Gregg Wolper is a senior mutual fund analyst with Morningstar.

Get mutual fund and stock information from our analyst team delivered to your e-mail inbox every Tuesday. Sign up for our free Investment Insights e-newsletter.

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