As 2017 comes to a close, it's a good time to conduct a little routine maintenance on the old financial engine. Looking after these simple but important details can help provide a smoother ride and improve the odds of arriving at your ultimate destination.
» Rebalance your portfolio. Over time, variations in asset class returns cause growing imbalances in portfolios relative to their target allocation. This year in particular, large cap U.S. equities and foreign stocks have enjoyed well above average returns compared with small caps and fixed income. That likely means your current exposure to this year's outperformers is too high.
The end of the year is a great time to review and rebalance. Sectors that have outperformed should be trimmed back to target level, using the proceeds to add to the underperformers. That way, you are more likely to benefit from the inevitable rotation during which the high fliers pull back and the laggards step forward. Ideally, rebalancing should take place quarterly, but at the very least, an annual revision is critical, and the beginning of a new year can provide an excellent opportunity.
» Review beneficiary designations. Has anything significant changed over the past 12 months, like a death, marriage, divorce or other changes in familial relations? One often overlooked but important consequence can be the perpetuation of incorrect or unintended specification of who will inherit your IRA or other retirement accounts. This type of account does not typically pass through the decedent's will, but instead is transferred directly to the beneficiaries named on the account. Take a few minutes to review the names on file as your beneficiaries and update as necessary. The list is maintained separately for each account you hold, and may be changed or revoked at any time at your sole discretion. You may also name so-called contingent beneficiaries to stand in line behind the primary designees should they predecease you.
The annals of estate planning are replete with examples of assets flowing through to unintended parties because the account holder forgot to change designations as relationships changed. And failure to list a legitimate living beneficiary often means the IRA passes through the estate, which may have adverse tax consequences for the heirs.
» Spend your FSA. If you participate in a Flexible Spending Account (FSA) at work in conjunction with your health plan, you probably know you typically must use it or lose it before the end of December (with some minor exceptions). Be sure to maximize the benefit by spending all the balance before it expires. The list of allowable medical expenses is broad, so make every effort to wipe out your balance.
» Check your credit. It's hard to overstate the importance of a solid credit history. But errors do creep in, and can make for an unpleasant surprise at the most inopportune time.
Consumers are entitled to one free copy of their report from each of the three major agencies every year. Visit AnnualCreditReport.com to access your reports (this is the only official site operated by the reporting agencies as mandated by federal law; avoid any site requesting a credit card). Your report includes instructions on how to request correction of erroneous or invalid data in your credit file. Not only are the agencies required by law to fix mistakes, but they actually want the records to be as accurate as possible.
These seemingly simple tasks can keep you on track with your long-term goals, but are easy to overlook. The closing of another year serves as a perfect time to knock them out.
Happy New Year.
Christopher A. Hopkins, CFA, is a vice president and portfolio manager for Barnett & Co. in Chattanooga.