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Your Midyear Financial To-Do List

Your Midyear Financial To-Do List

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. We're halfway through a year that's shaping up to be a difficult one for investors. Morningstar's director of personal finance and retirement planning, Christine Benz, is here today to help you make sure that your financial plan and portfolio are on track. She has a short list of financial to-dos for July.

Nice to see you, Christine. Thanks for being here.

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

Dziubinski: Now, both stocks and bonds have experienced losses so far this year. So, should all investors be doing some sort of midyear review in light of that?

Benz: Well, I do think that it comes back to your plan. Whatever plan you have for monitoring your portfolio, stick to it. So, I like the idea of investors having, what we call investment policy statements. One of the things you put in that investment policy statement is how often I am going to monitor my portfolio. Stick with whatever system that you've used for monitoring that portfolio. If you're looking at your portfolio just once a year at year-end, stick with that, don't look at it now. If on the other hand, you're monitoring it on a quarterly or maybe twice yearly basis, well then, midyear is a good time to get in there and do a checkup.

Dziubinski: Christine, if investors are planning to do a review—a midyear review of their portfolio and their plans, what types of things should they be focused on this year?

Benz: Well, I would start at the plan level. When you think about your main levers that you have and you're contributing to your retirement accounts, the main thing that is going to make or break your success is your contribution rate. So, check up on your contribution. If you possibly have the means to bump up your contribution, that can be such a powerful thing to do in a falling market because it means that you can buy more shares for the same amount of funds that you could when the market was higher. So, see if you can increase that contribution rate. Check up on that.

If you are retired, you want to look at your withdrawal rate because that is the main determinant of your plan's success or failure. A lot of the research that's been done around retirement decumulation, including some that we've done internally at Morningstar, points to the value of being variable in your withdrawals. Specifically, taking less in down markets. Now I know that both of these things—increasing contributions and taking less in down markets—kind of runs counter to the current environment where we have high inflation. It can be difficult to achieve those two things, but see what you can do, look at your own budget. It's pretty individual-specific.

Dziubinski: And then let's pivot now and talk a little bit about what you could be looking at the portfolio level.

Benz: Right. At the portfolio level, the key thing you want to focus on is your portfolio's asset allocation. So, do that x-ray view of your portfolio's asset allocation, compare it to your target asset allocation. If you don't have a target asset allocation, this should be your call to get one. And then also take a look at those subasset allocations. So, if you're a total market index, so you don't need to do this exercise. But if you're someone who has smaller bore holdings, so maybe of a value holding and a growth holding, those contents will have shifted as well in this market environment where we've seen value hold up much better than growth. So, get in there, look at your portfolio's style box exposure. Ideally, you wouldn't be listing heavily to one side or the other of the style box, that you'd be somewhat neutral with respect to your investment style exposure. So, do those checkups using X-Ray.

Dziubinski: Christine, you think midyear is a good time for investors to do a cost audit on their portfolio. What is that, and what does that entail?

Benz: Right. So, a cost audit basically means that you're going to go in and look at your whole array of investment-related expenses. These can be super sneaky because we're not writing checks for them typically—they're just getting deducted from our account. So you want to look at the whole gamut. You want to look at your investment advice expenses; make sure you're getting good value for your money there. And of course, that's a subjective assessment, but make an assessment of whether you think you're getting good value. Calculate in dollars and cents what you're paying for investment advice and make sure that it's worth it, that you feel like you're getting advice commensurate with those outlays. Also, look at your investment-related costs. This is low-hanging fruit when it comes to trying to pare costs from your portfolio. So, one of the easiest moves you can make is to switch into low-cost index funds or exchange-traded funds in lieu of actively managed funds. Those will typically slice your expenses way, way down.

Dziubinski: Christine, you also say midyear is a good time to do a tax audit of your portfolio. So, again, define what that is, and walk us through how an investor might do that.

Benz: Right. Like your investment costs, your tax costs are going to come out of your portfolio, whether it's up or down. So, when it's down, I think it's a good time to be attuned to what you are paying in tax-related costs. The starting point is to make sure that you are availing yourself of any tax-sheltered options that you have available to you if you are making contributions. So, that would be your 401(k)s, your IRAs. Health saving accounts can be super-attractive from a tax standpoint.

Then, if you have taxable holdings, which is often the case, especially for more-mature investors who are a little further in their investment journeys, look at the tax drag that is being exerted on that part of your portfolio. And there your 2021 tax return can be a good lens to gauge how tax-efficient those investments are. If you look back on your 2021 return and you see big capital gains distributions for some of your holdings, you might look at whether you can engineer a tax-efficient makeover.

So, if you are looking for tax-efficient options and you have equity holdings, there, exchange-traded funds, index funds tend to be very nice tax-efficient options. They are also very low cost. So, they win on the cost audit part of the equation. And then, if you have fixed-income holdings in your taxable portfolio, take a look at whether municipal bonds might not make sense for you. This is going to be particularly advantageous for higher-income investors.

Dziubinski: Well, Christine, thank you so much for your time today, for this midyear portfolio and financial plan review checklist. We appreciate your time.

Benz: Thank you so much, Susan.

Dziubinski: I am Susan Dziubinski with Morningstar. Thanks for tuning in.

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