So, today is the first day of the last month of the year. You know, it always feels like year is ending at the end of August. Two long months July and August are over and year end is almost there.
Year end is always a good time prepare your end of the year report. Much like companies file their 10-K or whatever they file at the end of their financial year. We can look not only at your financial life but also other aspects of life and take a stock of the situation.
Financial - if you invest in individual stocks, how's your performance? Performance can be compared against benchmark such as S&P 500 index. As it has been verified historically, many active investors fail to match market performance over long time. So, if you are not faring at least as well as market, it may be time to shift back those hard earned money to passive modes of investing such as index funds, indexed ETFs are whatever and save of transaction costs. Most of the online stock brokers such as Scottrade make it easy to calculate your performance. Also, time to think about dumping all those money losing stocks and take the write offs on the tax return.
It is also time to re-balance your portfolio. Rule of thumb is to maintain a healthy ratio of funds invested in stocks and bonds. Rule is to subtract your age from 120. Maintain in stocks what equals (120 minus your age)diversified stocks and rest in a bonds. If you are 35, it means 85% in stocks and 15% in bonds. This gives a fairly aggressive portfolio which should appreciate at the rate of around 10% year over year over the long term. In last 5 years, this portfolio has delivered around 15%. Much better than any active trading can consistently perform.
You have to be careful how you re-balance in your non-retirement portfolio. Reason is when you try to balance in an active portfolio, you effectively sell appreciated assets and buy less appreciated assets. So, you will have to pay additional capital gains. One way to avoid is to leave the appreciated assets as such and defer any further investments in that area. Continue to buy bonds if bonds are in less ratio than ideal and stocks if they are in less of a ratio till that point optimum ratio is reached. That way ratio comes to required state in a few months. Then again you can start buying the mix of stocks and bonds in the ratio you desire. This works well if you invest on regular basis. It is best invest on monthly basis. Gives ample opportunities to re-balance all through the year based on your desired optimum mix.
Or you can choose on of those life cycle mutual funds which adjust your stocks-bond ratio based on your set retirement age. You can choose a lifecycle fund with retirement set to some year in the future. They automatically adjust such ratio based on the objective of the fund which takes less risk as the target year approaches.
Also, it is the time to organize all the paperwork. Look into aspects such as insurance, medical records, setting up appointments for medical check ups, wills, checking out if you have nominated appropriate beneficiaries etc.
Good luck and get ready to welcome new year with new hope. Things are going to get better. We can at least hope so!!!
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