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A Year-End Portfolio Review for 2023

Check up on your portfolio’s health—and that of your whole plan—as the year winds down.

For investors, 2023 was a welcome reversal from 2022′s annus horribilis. As inflation showed signs of easing, both the stock and bond markets breathed a sigh of relief that the Federal Reserve’s aggressive interest-rate hikes were likely behind it. U.S. stocks, especially the large-cap growth and technology stocks that were hit so hard in 2022, recovered a lot of their lost ground. Bonds also regained their footing. Meanwhile, cash yields remained robust.

If you’re a disciplined investor, you can use an annual portfolio review as a way to check up on your portfolio—and potentially make some changes—within the context of your well-thought-out plan. After all, even if you haven’t actively made changes to your portfolio mix, the contents of your portfolio may have shifted.

I like the idea of thinking of your annual portfolio review as an inverted pyramid, with the most important jobs at the top and the least important ones at the bottom. That way, if you run out of time and need to give something short shrift, you’ll have attended to the most important considerations first.

Here are the key steps to take:

  1. Conduct a wellness check.
  2. Assess your asset allocation.
  3. Check the adequacy of your liquid reserves.
  4. Assess suballocations and troubleshoot other portfolio-level risk factors.
  5. Gauge inflation protection.
  6. Review holdings.
  7. Attend to tax matters.

Step 1: Conduct a Wellness Check

Begin your portfolio checkup by answering the question: "How am I doing on my progress to my goals?"

For accumulators, that means checking up on whether your current portfolio balance, combined with your savings rate, puts you on track to reach whatever goal you’re working toward. Tally your various contributions across all accounts for the year: A decent baseline savings rate is 15%, but higher-income folks will want to aim for 20% or even higher. Not only will high earners need to supply more of their retirement cash flows with their own salaries (Social Security will replace less of their working incomes), but they should also have more room in their budgets to target a higher savings rate. You’ll also need to aim higher if you’re saving for goals other than retirement, such as college funding for children or a home down payment.

If your annual savings rate will fall short of what you’d like it to be, take a closer look at your household budget for spots to economize. In addition to assessing savings rate, take a look at your portfolio balance: Fidelity Investments has developed helpful benchmarks to gauge nest egg adequacy at various life stages. (Also be sure to read Amy Arnott’s discussion of the pros and cons of these benchmarks.)

If you’re retired, the key gauge of the health of your total plan is your withdrawal rate—all of your portfolio withdrawals for this year, divided by your total portfolio balance at the beginning of the year. The “right” withdrawal rate will be apparent only in hindsight, but if you’re just embarking on retirement or would like to gauge the viability of your current spending, our recent research on withdrawal rates should provide good food for thought.

All-in-one retirement calculators can also be useful when assessing the viability of all aspects of your plan. Tools like T. Rowe Price's Retirement Income Calculator and Vanguard's Retirement Nest Egg Calculator bring all of the key variables together and help you identify areas for improvement.

Step 2: Assess Your Asset Allocation

Once you’ve evaluated the health of your overall plan, turn your attention to your actual portfolio. Morningstar’s X-Ray view—accessible to investors who have their portfolios stored in Morningstar Investor—provides a look at your total portfolio’s mix of stocks, bonds, and cash. (You can also see a lot of other data through X-Ray, which I’ll get to in a second.) You can then compare your actual allocations to your targets. If you don’t have targets, the Morningstar Lifetime Allocation Indexes are useful benchmarking tools. High-quality target-date series such as BlackRock LifePath Index can serve a similar role for benchmarking asset allocation; focus on the vintage that roughly matches your anticipated retirement date. My model portfolios can also help with the benchmarking process.

Although stocks posted stellar gains in 2023, many investors may not have recovered their 2022 losses. But investors who didn’t reduce their equity exposure during stocks’ long-running rally prior to 2022 may find that they’re still a bit heavy on stocks relative to their targets.

An equity overweighting isn’t a huge deal for younger investors with many years until retirement. But if your portfolio is notably equity-heavy relative to any reasonable measure and you’re within 10 years of retirement, derisking by shifting more money to bonds and cash is more urgent. You could make the adjustment all in one go or gradually via a dollar-cost averaging plan. Just be sure to mind the tax consequences of lightening up on stocks as you’re shifting money into safer assets; focus on tax-sheltered accounts to move the needle on your total portfolio’s asset allocation.

Step 3: Check the Adequacy of Your Liquid Reserves

In addition to checking up on your portfolio’s long-term asset allocations, your year-end portfolio review is a good time to check your liquid reserves. If you’re still working, holding at least three to six months’ worth of living expenses in cash is essential. Higher-income earners or those with lumpy cash flows should target a year or more of living expenses in cash.

For retired people, I recommend six months’ to two years’ worth of portfolio withdrawals in cash investments; those liquid reserves can provide a spending cushion even if stocks head south or bonds take a powder as they have so far this year. (The year 2022 demonstrated the virtue of holding cash if you’re in drawdown mode.)

In addition to checking up on the amount of liquid reserves that you hold, also check up on where you’re holding that money. Online savings accounts are usually among the highest-yielding FDIC-insured instruments, but money market mutual funds, which aren’t FDIC-insured, offer you the convenience of having your cash live side by side with your investment assets. Yields on brokerage sweep accounts, which offer convenience for traders who like to keep cash at the ready, are often stingy on the yield front. Certificates of deposit offer some of the highest yields available today, albeit with strictures on withdrawals.

Step 4: Assess Suballocations and Troubleshoot Other Portfolio-Level Risk Factors

Growth stocks staged an extremely strong recovery in 2023, and they have trumped value over longer time periods, too. Similarly, large-company stocks have dramatically outpaced the market’s small fry. Check your portfolio’s Morningstar Style Box exposure in X-Ray to see if it is tilting disproportionately to large-cap growth names. While you’re at it, check up on your sector positioning; X-Ray showcases your own portfolio’s sector exposures alongside those of the S&P 500 for benchmarking.

On the bond side, review your positioning to ensure that your bond portfolio will deliver ballast when you need it. While signs point to a soft landing for the U.S. economy, well-diversified portfolios include securities that will hold up well in recessionary periods. High-quality bonds have delivered, historically, during such periods.

Step 5: Gauge Inflation Protection

Inflation was a nonissue for the better part of the past decade, but it surged in 2021 and 2022. If you’re still working, eligible for cost-of-living adjustments to your salary, and have ample stock exposure in your portfolio, there’s no pressing reason to add in a lot of inflation protection. On the other hand, retirees with healthy shares of their portfolios in fixed-rate investments are more vulnerable, in that inflation gobbles up the purchasing power of their meager yields. Treasury Inflation-Protected Securities and I Bonds help address that risk by offering an adjustment to account for inflation. I like to group inflation-defending investments into a few key categories: broad basket (TIPS), more narrowly focused (commodities, real estate), and what I call “inflation beaters” (stocks).

Step 6: Review Holdings

In addition to checking up on allocations and suballocations, take a closer look at individual holdings. Scanning Morningstar’s qualitative ratings—Morningstar Ratings for stocks and Morningstar Medalist Ratings for mutual funds and exchange-traded funds—is a quick way to view a holding’s forward-looking prospects in a single data point.

If you're conducting your own due diligence, be on alert for red flags at the holdings level. For funds, red flags include manager and strategy changes, persistent underperformance relative to cheap index funds, and dramatically heavy stock or sector bets. For stocks, red flags include high valuations and negative moat trends.

Step 7: Attend to Tax Matters

Year-end is also your deadline for several tax-related to-dos, some of which touch your portfolio. If you’re still in accumulation mode, review how much you’re contributing to each of the tax-sheltered account types that are available to you: IRAs, company retirement plans, and health savings accounts. Contribution limits for 401(k)s, 403(b)s, and 457 plans will be increasing a bit in 2023, to $23,000 for workers under age 50 and $30,500 for workers who are 50-plus. The IRA contribution limit is also going up to $7,000 for investors under age 50 and $8,000 for investors who are 50 and over.

In addition, retirees who are age 73 and older must take required minimum distributions from tax-deferred accounts before year-end. I’m a big believer in taking a surgical approach to RMDs, using those withdrawals to correct portfolio problem spots. Charitably inclined investors who are age 70.5 or older should take advantage of what’s called a qualified charitable distribution.

A version of this article was published on Jan. 18, 2023.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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About the Author

Christine Benz

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Christine Benz is director of personal finance and retirement planning for Morningstar, Inc. In that role, she focuses on retirement and portfolio planning for individual investors. She also co-hosts a podcast for Morningstar, The Long View, which features in-depth interviews with thought leaders in investing and personal finance.

Benz joined Morningstar in 1993. Before assuming her current role she served as a mutual fund analyst and headed up Morningstar’s team of fund researchers in the U.S. She also served as editor of Morningstar Mutual Funds and Morningstar FundInvestor.

She is a frequent public speaker and is widely quoted in the media, including The New York Times, The Wall Street Journal, Barron’s, CNBC, and PBS. In 2020, Barron’s named her to its inaugural list of the 100 most influential women in finance; she appeared on the 2021 list as well. In 2021, Barron’s named her as one of the 10 most influential women in wealth management.

She holds a bachelor’s degree in political science and Russian language from the University of Illinois at Urbana-Champaign.

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