A Financial To-Do List for February

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. Morningstar's director of personal finance Christine Benz has created a month-by-month financial to-do list for 2021, and she's here today to talk with us about what should be on our to-do list for February.

Hi, Christine. Thanks for being here.

Christine Benz: Hi, Susan. It's great to be here.

Dziubinski: The first task you recommend that we sort of check off our list for February is to do an investment review. How would someone go about doing that?

Benz: Right. The idea here is that you want to check on the characteristics of your portfolio today. One thing I would say, Susan, is that if people went through this process at the end of 2020, there's no need to get back in there and redo it. But if you've been one of the many investors who's been feeling a little bit inert or complacent about your portfolio, you've been kind of letting your winners ride, I think it is a time to take a closer look at your portfolio's asset allocation. Maybe some of the market volatility that we've had very recently would be kind of your impetus to do that. And basically, you want to check on your portfolio's current asset-class exposures relative to whatever target you have for them. And we've had such strong equity market performance that for many of us our equity holdings maybe a little larger than our target, and that's particularly important if we're getting closer to retirement. So, check on that.

I like Morningstar's X-Ray functionality to help with that job. Check on your exposure to safer assets. If you're a younger investor where you've got the bulk of your portfolio in equities, the key job you want to tackle is looking at your intra-equity exposure. One recommendation I would make to many people at this life stage is to check their foreign relative to U.S. exposure. We've had better performance from U.S. stocks. But when we look at what market forecasts look like for the next decade, there's the widespread expectation that foreign stocks will perform better than U.S. in the decade ahead, in part because of lower starting valuations. So, check out those asset-class exposures as a starting point.

Dziubinski: And then, do you recommend that investors look sort of beyond their asset allocation? What other factors might they be looking at in an investment review?

Benz: They definitely should. If you have time, if your schedule permits, delve a little bit more deeply, look at your stock exposure, individual stock exposure. Many investors hold side portfolios of individual stocks as well as mutual funds. In X-Ray, you can check out how your portfolio is exposed to some of those big-cap names that dominate many mutual funds. If you also hold them individually in brokerage accounts, you may have more exposure there than perhaps you expected.

I think it's a great time to look at the expenses that you're paying on your holdings. The expectation is that market returns will be pretty constrained over the next decade. So, one of the best things you can do to improve your take-home returns is just to lower what you're paying in fund fees, and thankfully, investors seem to have gotten the message on that front. But take a look at your expense ratios.

Also, take a look at the tax efficiency of your portfolio. If you have your assets in multiple silos, as many of us do, you want to pay special attention to your taxable account just to make sure that you are managing that account with an eye toward reducing the drag of taxes on an ongoing basis. Equity exchange-traded funds are a great way to keep your tax costs down. If you're a bond investor, especially if you're a higher-income bond investor, municipal bonds may make sense. So, do a little bit of a tax audit as well if your schedule permits.

Dziubinski: And speaking of taxes, those tax documents are starting to roll in. You say now is a good time for us to start to gather the documentation that we will need for filing our taxes. What are some things we should be aware of?

Benz: One of the key things I would think about as I sort of start this process of tax season is whether you're likely to be an itemized deduction person or whether you'll take the standard deduction. One thing we've had for the past few years is a very high standard deduction. Many fewer taxpayers are itemizing than in the past. In fact, I think the most recent data pointed to just about 15% of taxpayers itemizing today. But nonetheless, that's still a healthy share of our population. If you're not an itemizer, that means that you don't have to gather up all of those documents that you would need to support your itemization. So, you wouldn't have to worry about the healthcare expense documentation, the charitable contribution documentation, and so forth. But if you are an itemizer, you would want to get serious about collecting those documents.

One thing I want to flag with this tax season for the 2020 tax year, Susan, is the fact that we have a special $300 deduction that's available for charitable contributions in 2020. That's available to taxpayers whether they are using the standard deduction or itemizing. So, even if you are taking the standard deduction and you made charitable contributions last year, make sure that you're taking advantage of that admittedly small deduction.

Dziubinski: Now, you've talked in the past a little bit about how our 1099s and W-2s can actually yield some really interesting financial information. Let's talk a little bit about that.

Benz: Definitely. So, W-2s, starting with that, I would say, don't just put them in the folder or plug them into whatever sort of software you're using for your taxes. Actually, take a little bit of time to gather some intelligence from them. You want to keep an eye on salary trend, and for many people, 2020 was not a great year in terms of income. Lots of people had income disruptions, but you want to keep an eye on salary trend from year to year. But also, take a look at how you took advantage of any contributions that you were able to make through your company retirement plan. So, check into whether you were able to fully fund your 401(k) or whatever retirement plan that you have available to you in 2020. Also, check if you are covered by a high-deductible healthcare plan and you're using the company provided HSA. Check to see if you were able to take advantage of that as well. Those are pieces of information that you'll find on your W-2.

In terms of 1099s, there I think investors can gain a lot of intelligence about how they are managing their accounts. They can see if they are paying hefty levels of income, tax on income in taxable accounts. Can they maybe make some changes to their asset placement, so can they get those high-income--higher-income, I should say--investments into tax-sheltered accounts? Also, take a look at if you've got mutual funds in your taxable accounts, were you paying high levels of capital gains because the funds were making distributions? One point I've been making in that area is that investors who have these serial capital gains distributors in their taxable accounts, they've been kind of prepaying taxes as they've gone along. So, the tax hit associated with moving those assets, moving into a more tax-friendly investment, may be a little less than you bargained for. So, check with an accountant on that, but you may have been effectively prepaying the taxes that you would owe if you sell that investment and swap into something that's more tax-efficient.

Dziubinski: Well, Christine, thanks so much for some financial to-dos for us in February. We appreciate your time.

Benz: Susan, thank you so much.

Dziubinski: I'm Susan Dziubinski with Morningstar. Thank you for tuning in.