Your Financial To-Do List for February 2022

Susan Dziubinski: Hi, I'm Susan Dziubinski with Morningstar. The year 2022 has gotten off to a volatile start for investors. Joining me to share some practical and constructive steps that you can take to gain a sense of control in an unpredictable market is Christine Benz. Christine is Morningstar's director of personal finance and retirement planning.

Hi, Christine. Good to see you.

Christine Benz: Hi, Susan. Great to see you.

Dziubinski: Every year, you lay out a year's worth of a financial to-do list that takes us month by month. And for the month of February, one of the things on our to-do list is to conduct a review of our investments, and that seems especially timely this year given the backdrop of the market volatility we've been experiencing. So, how should investors be thinking about this review this year?

Benz: Well, I think it's important to take a look because as investors oftentimes our natural tendency is to be a little bit inert that we tend to not want to make changes, we tend to want to leave well enough alone. And oftentimes, that's a really good strategy. But I think the net effect of that is that over time our portfolios do get a little bit more aggressive, and that might not necessarily be the direction that we want them to be going in.

The starting point of this is to get a sense of your portfolio's total asset allocation today. I would urge people to use our X-Ray functionality, which they can either access through our Portfolio Manager tool or through Instant X-Ray, just to get their arms around all of their accounts together that they have earmarked for a given goal to see what that asset allocation looks like today. Use that as the starting point for the process.

Dziubinski: How can an investor figure out that maybe a change or some sort of shift is in order?

Benz: I think it's very situation and life-stage specific. So, for younger investors, they absolutely should be standing pat with equity-heavy portfolios, at least for their retirement assets. I think that the areas that they may want to take a look at would be more in the realm of how their portfolios are positioned style box wise. So, for example, do they have too much in the growth column of the style box. They would also want to look at the geographic exposure of their portfolios. Are they globally diversified? Do they have enough non-U.S. exposure? And then, it's also a good bet that younger investors who are many years from retirement still have some nearer-term goals, some nearer-term things that they'd like to do with their money. Certainly, they should look at derisking that portion of their assets that they expect to use in the shorter term, whether for a home down payment or for the college fund, whatever it might be, consider derisking that portion of the portfolio.

For people getting closer to retirement, there I think derisking is more mission critical, because many investors have been comfortable with their equity exposure, they've had great results from the equity market for a really long time now, and so, they may have been disinclined to get in and peel back from stocks and potentially increase their fixed-income exposure. But I like the idea of people who are embarking on retirement having roughly 10 years' worth of assets set aside in cash and in bonds, and that way they could effectively have an asset mix that they could spend through if they needed to, if a bad equity market occurred early on in their retirements, they could tap the safe stuff first and leave the equity exposure alone. So, take a look at that. If you're someone who is in that zone of approaching retirement or already retired, look at your share of safer assets, your share of liquid reserves.

Dziubinski: Another to-do for investors in February is to start thinking about taxes. Tax season is going to be here before we know it. The tax filing deadline is as of right now April 18. What should people be doing to get the ball rolling now?

Benz: I think it's good to have a plan for these documents which are starting to come in, so W-2s if you're earning an income through payroll, 1099s. Investors are getting these 1099s in their email boxes. Some of them are still getting the physical mail. So, just make sure that you have a place where you are storing those documents and filing them away or getting them ready for tax season.

Dziubinski: Speaking of those documents, Christine, many of us, me included, print out and file those documents and just have them ready to send off to the accountant to do our taxes. But you say that we should take a minute and actually review these documents because there's a lot of useful information on them. Walk us through some of that.

Benz: There really is. In fact, I think sometimes this tax season, it's a pain, but it's sort of an underutilized opportunity to do some bigger-picture thinking about the health of your plan. So, for example, if you've gotten your W-2 recently, and you also were lucky enough to get a raise last year, look at whether you are funding your 401(k) to the maximum extent that you can swing. Look at your health savings account contributions. If you're able to make an HSA and you're covered by a qualifying high-deductible healthcare plan, are you taking advantage of those HSA contributions to the extent that you possibly can?

With the 1099s, I think there are some valuable intelligence to be gathered from them as well. So, for example, if you are receiving sizable income distributions from some of your holdings and you have them within your taxable account, that's a flag for suboptimal asset location. Ideally, to the extent that you have high-income holdings, and really, there's not a lot of income these days, but if you have anything that's kicking off a lot of ordinary income, you'd want to have that housed within your tax-sheltered accounts. If you have holdings, mutual fund holdings, that have made big capital gains distributions, for example, that's another place to look at whether perhaps you can reposition that account so that you're holding more tax-efficient holdings like exchange-traded funds, for example. So, spend a little bit of time doing some big-picture thinking about how you might actually improve your plan in the future rather than just sort of copying the numbers onto your tax return or into TurboTax or whatever mechanism you use for filing your taxes.

Dziubinski: Well, Christine, thank you for your time today and for walking us through some financial to-dos for February. We appreciate your time.

Benz: Thank you so much, Susan.

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