2 Items for Your Portfolio-Review Checklist

I recently wrote about how very strong results from U.S. equities accentuate the benefits of revisiting your portfolio's asset-class exposures and potentially rebalancing among them. If you're within 15 or 20 years of retirement, you might consider paring back stocks in order to increase your allocations to safe securities like cash and bonds. If you're a younger investor, a stock-heavy portfolio mix probably still makes sense, though you may want to take a closer look at your equity portfolio's division between U.S. and foreign stocks. Foreign equities have lagged U.S. equities over the past decade, but many market experts believe foreign stocks' return prospects are better than U.S. stocks over the next seven to 10 years.

Revisiting your asset allocation seems especially important given the long-running equity rally that has prevailed for the better part of the past decade. But your portfolio's positioning isn't the only factor to check up on a periodic basis. Just as your portfolio's allocations can become outdated given your situation, so can some of the elections that you made when you initially set up the account. Here are two key ones to keep on your radar.

Beneficiary Designations When it comes to estate planning and figuring out what will happen to your assets when you're gone, wills and trusts often dominate the discussion. But beneficiary designations do much of the heavy lifting in terms of who inherits your investment accounts. Attending to them can help ensure that the bulk of your assets pass in the way you'd like, even if you haven't had time to create or adjust your estate plan with an attorney. In fact, those beneficiary designations will override bequests that you've made elsewhere, such as in your will. Your will might state that you want your spouse to inherit all of your assets, for example, but your brother will get a piece of the pie if you named him as the beneficiary of your company retirement plan and didn't bother to change it after you got married.

That example illustrates why it's so important to keep beneficiary designations up to date. When your life changes--because of marriage, birth of a child, or divorce, for example--who you'd like to inherit your assets may change, too. And if you've gone to the trouble and expense of setting up an estate plan with an attorney, ask for specific guidance on the wording of your beneficiary designations so that your documents are in sync.

Life events aren't the only trigger for reviewing your beneficiary designations. If you or your employer has recently switched retirement-plan or insurance providers, the beneficiaries you specified with your previous provider may not automatically carry over to the new one.

Cost Basis Elections In contrast with beneficiary designations, which you make actively, investment firms often operate with default methods for tracking your cost basis. Cost basis simply refers to the price you paid for investments in your taxable account, which in turn affects how much you'll owe in investment-related taxes when you sell. In a taxable account, you're taxed on the difference between your cost basis and your sales price.

If you made a one-time purchase of a non-dividend-paying, non-capital-gains producing stock or fund and let it ride, there's no question about your cost basis: It's simply the price you paid, adjusted upward for any commissions you paid. But cost basis can get more complicated when you've made purchases at several intervals, or if you're reinvesting dividends and/or capital gains. Those distributions, if reinvested, adjust your cost basis upward to ensure that you won't pay taxes on those distributions when you sell; you'd have already paid taxes on them in the year you received them.

Owing to laws that went into effect earlier this decade, investment providers are now required to report cost basis directly to the IRS; investors are no longer on the honor system. (However, it's important to note that firms are only required to report cost basis for "covered securities": That means stocks that you acquired after 2011 and mutual funds purchased after 2012.) If you don't take active steps to specify your own method for cost basis, usually by filling out a separate form or doing so online, the investment firm will employ its default method for cost basis, which may or may not be what you want.

For mutual funds, the default cost basis that most companies use is "average" cost basis: The firm takes an average of all of your purchase prices (net asset values). The differential between the average and the sale price determines how much tax you'll owe when you sell. Averaging is only available for funds; it's not available for stocks. It's important to note that if you've used the average method for a fund before (or you've sold and the fund company used averaging as a default in what it reported to the IRS), you need to stick with this method for as long as you own the fund. You can't switch to a different method.

For stocks, most brokerage firms use as a default a method called "First In, First Out." That means that when you sell a chunk of a position that you've amassed in stages over time, the investment firm is assuming that you sold the shares you acquired first. If the security's value has increased over time, FIFO may cost you more in taxes because the spread between your purchase and sale price is apt to be greater.

In lieu of those default methods, I've long recommended the "specific share identification method" or "specific lot" method for cost basis, especially if you amassed the position gradually and plan to sell gradually, too. If you've selected this method, you can tell your provider which specific lot of shares you'd like to sell. For example, you may wish to sell your highest-cost-basis shares (closest to today's selling price) while leaving your other holdings intact. And if you find yourself in a low tax bracket--or even the 0% tax bracket for long-term capital gains--you may wish to sell the low-cost-basis shares because it's better to unload them when your tax bracket is at a low ebb.

Specific share identification can also be useful for tax-loss harvesting, enabling you to prune just those positions that will net a loss while leaving lower-cost-basis securities intact.

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