How to Conduct a Midyear Investment Portfolio Review in 2023

Susan Dziubinski: Hi, I’m Susan Dziubinski for Morningstar. We’re near the halfway point in 2023, and investors may be thinking about conducting a midyear portfolio review. Here today to discuss what portfolio matters investors should be focused on is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning.

Nice to see you, Christine.

Christine Benz: Susan, great to see you.

Portfolio Management

Dziubinski: Hard to believe that we’re at the midway—getting close to that midway point. But you say that a good first step on a checkup is to really check if your plan is on track. So, what would such a checkup entail?

Benz: Right. This is where I would always start, kind of, that wellness check, whatever you want to call it. And so, it really depends on your life stage, how you approach this. If you’re someone who is already retired, the best check on the health of your plan is your current withdrawal rate. So, do a little bit of a check on where you are year-to-date in terms of your withdrawals. The nice thing is we’re only halfway through the year. There’s still time to do a little bit of a course correction if it turns out, for whatever reason, you’ve been spending a little bit more than you would have liked for the first half of the year. So, do a check on that. You might reference our research that we’ve done on retirement income, retirement spending, where when we looked at this issue in late 2022, we determined that roughly 4%, 3.8% starting withdrawal made sense for people with a 30-year time horizon. So, you can use that as a benchmark. And we looked at different time horizons for older retirees.

If you are someone who is still working and accumulating assets for retirement, the best check on how you’re doing is how much you’ve saved but also how much you’re able to save on an ongoing basis. So, one thing to keep in mind there is just that we have seen increases in the allowable contribution amounts for 401(k)s, 403(b)s, 457s, for IRAs, for health savings accounts. So, if you haven’t revisited how much you’re putting in and if you’re in a position to max out any or all of those accounts, that certainly redounds to the benefit of the health of your plan. So, do that look at how much you’re contributing. You may also want to use one of the many retirement calculators that are out there just to determine whether that plan is on track as it’s currently situated.

Liquid Reserves and Cash Yields

Dziubinski: So, then the next step is to move on to your liquid reserves. And cash yields look a lot better than they have in a really long time.

Benz: They sure do.

Dziubinski: So, what should investors be thinking about as a good target for how much cash to have on hand?

Benz: Again, I think it really depends on life stage. So, for retirees, I like the idea of them running with one to two years’ worth of portfolio withdrawals on an ongoing basis. This is kind of the Bucket system that I talk about so frequently. The idea is that if we encounter another year like 2022 where bonds are in the dumps, stocks are not great, you would have something to pull from to give yourself a little bit of a buffer, so you’re not having to invade those depressed asset classes. So, that’s the idea of a Bucket structure. I think one to two years’ worth of portfolio withdrawals is plenty. In the current yield environment, if you want to have a little higher cushion, I don’t see too much wrong with that, but you probably don’t want to overallocate to cash.

For people who are still working, I think there—three to six months’ worth of living expenses is a good benchmark. I would nudge that a little bit higher if I’m a more specialized worker, where it may take me a little longer to replace my job if I should lose it, if I’m a higher paid worker, we know that sometimes those jobs take a little bit longer to replace, and then just kind of as a matter of common sense, if I’m the sole earner in my household and I have other people depending on me, I like the idea of having a little higher cash cushion there as well.

Assessing Your Portfolio’s Asset Allocation

Dziubinski: That makes sense. So, let’s talk a little bit about those longer-term components of your portfolio. Stock and bond market performance has improved this year relative to last year. So, what should people be looking for as they’re assessing their asset allocations?

Benz: Right. Do a baseline look at your asset allocation. You should have some sort of target that you’re operating with. If you have not looked at your asset allocation recently, my guess is that for a lot of us as we investigate our portfolios, we may find that our equity holding is actually a little bit above our target given that equities have had a decent recovery so far in the first half and also just, over the long run, equities have so far outperformed other asset classes. I just looked this morning, Susan, a total U.S. market index would have returned about 12% over the past 10 years. Bonds are barely in the black over the past decade. So, if you’ve been hands-off, and that’s a good policy with respect to your portfolio, you may be a little bit equity-heavy, especially if you are getting close to retirement. I think it’s particularly urgent for people at that life stage to consider de-risking the stock portion of your portfolio. Equities have been good to you. You won’t want to pull them back entirely, but putting a little bit more money in the safe stuff, I think, makes some sense.

Dziubinski: Let’s talk a little bit about those sub-allocations, specifically maybe within the stock portion of your portfolio, I mean, especially considering growth stocks have done really well this year, right?

Benz: They have. They were basket cases last year, but they have really recovered well, much more so than the value portion of the style box. I was looking—mid-growth and large-cap growth have really been the superstars over the past year. So, investors who haven’t looked at their portfolio’s style box exposure should take a look. They may want to reallocate to value if they have discrete value and growth holdings in their portfolio. I think the thing you want to be careful about is not overdoing that value exposure, not overdoing that small-cap exposure. You want balance. Because if we’re looking at the potential for a recession, those cyclical stocks will tend to get hit a little harder. In fact, I think that’s what’s been going on so far this year, where we’ve seen some of those cyclical names, which performed relatively well last year, they’re getting knocked back down this year. So, you want balance. I would use a total market index as kind of my compass for figuring out how much that I would hold in each of those style-box squares. International versus U.S.—I would continue to bang the drum for investors looking at their non-U.S. holdings because non-U.S. has definitely underperformed the U.S. even though last year was a somewhat different story. So, if you haven’t reallocated to non-U.S., I would take a look at doing so.

When Should Investors Be Trading and Selling?

Dziubinski: And then, assuming someone finds that, yeah, maybe I am—the portfolio is a little out of whack here. Maybe I want to raise some cash. Maybe I’m heading into retirement and I don’t have enough. What does an investor need to keep in mind before making those trades and sells?

Benz: Well, one of the key things is just the tax management of all of this. So, if you are selling appreciated holdings, say you have large-cap U.S. growth holdings that have really appreciated, and you hold them in your taxable account, well, you want to proceed with care because you could trigger a tax bill by doing the rebalancing to get things back into whack. Ideally, you would see if you can’t move the needle in terms of your portfolio’s asset allocation by concentrating your energies within your tax-sheltered accounts, where you’re not going to pay that year-to-year tax bill if you do any selling and repositioning. So, look there.

Another thing I would say is if investors look at their taxable portfolios, they may still have some tax losses that they can find. They may have recently purchased positions, positions that they bought within the past couple of years, that are actually going to yield a tax loss. There’s no expiration on those tax losses, even though we often hear about it at the end of a bad year. You may still have some tax losses in your portfolio. So, just keep in mind the tax implications before barreling into any changes that you would want to make to your portfolio.

Dziubinski: Christine, thank you for your time today and for these midyear portfolio review tips. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch “Avoid These Mistakes With Your Cash, Bonds, and Stocks” for more from Christine Benz.