Everyone should take a close look at their finances once a year and make a plan for the next 12 months. If you don’t have a habit of reviewing your finances (including investments) once a year, you are more likely to act impulsively when something spooks you. You haven’t checked your investments for over three years, but now the markets are going down, it is all over the news and it gives you the shivers. When you do think you are most likely to make a rational, objective and advantageous decision – when you review your finances according to schedule or when you impulsively act out of fear?
Five things to review annually
How is your investment strategy working out?
- Is your investment portfolio still meeting your requirements when it comes to risk profile, time frame, goals, ethics, and other preferences?
- Has anything changed since your last review that have prompted you to get new goals for your investments? How do you want this to be reflected in your investment portfolio?
- Do you have new responsibilities in your life, or maybe fewer than last time?
- Is your income from non-investments still the same, or have there been changes that may prompt a change of investment strategy, size of monthly contributions, insurance coverage, etc?
- Have you been able to use part of your investment portfolio to fulfill a goal, e.g. buying that car or putting a down-payment on the vacation cottage? If so, do you want to make any changes to your portfolio now that this goal has been accomplished? Maybe devote more assets towards long-term goals if you have managed to achieve one of the short-term goals, or maybe add a new smallish goal to keep you motivated in the year to come?
A common pitfall is to start changing things in the investment portfolio just for the sake of changing. Many people confuse the term proactive with being active for the sake of being active. Being proactive when it comes to investments is not about making changes just because. It is about regularly reviewing your investments and life situation and make adjustments when adjustments are a warranted. If it ain’t broken, don’t fix it.
Another pitfall is the all-or-nothing approach. You decide that you need a more low-risk portfolio and this causes you to toss out all of your high-risk investments and go on a gov-bond shopping spree. Or you dislike the performance of company XYZ last year so you sell all your shares in the company the day after your review.
Is your portfolio still ideal from a tax perspective?
Tax law and its interpretations are subject to change, which means that the investment portfolio that was great from a tax perspective last year might be – or be about to become – a tax trap for you. This is why it is important to review your investment portfolio from a tax perspective once a year, taking new and scheduled tax law changes into account.
If you have family, you probably also want to check if any adjustments need to be made to ensure a low inheritance tax in case of your demise.
Do you have the right insurance coverage?
Many people see insurance as a separate thing that doesn’t really have anything to do with their investment portfolio, but since adequate insurance – or the lack thereof – can have such a huge impact on your finances we suggest that you always take a look at your insurance situation when you review your investment portfolio.
It should also be noted that in many parts of the world, there are insurance options available that can be seen as a type of investment rather than pure insurance. In some cases, these insurance policies offers the holder a favorable tax treatment.
Should you change your will?
As mentioned above, proper inheritance tax planning can be an important aspect of the annual investment portfolio review. While you are doing this, we suggest that you also check to make sure that your will (testament) is up to date and reflects your current circumstances and wishes. Also make sure that key individuals know how to access relevant documents if necessary.
Marriages, separations, divorces, births and deaths in the family are just a few examples of events that can prompt a change of your will. A child going from being a minor to being of legal age, or leaving college and starting work, can also be a significant milestone, and can influence your investment strategy as well as your estate plan.
Other important documents that we recommend that you review once a year are power of attorney, health care proxy and any advance healthcare directive (also known as living will).