Happy belated new year! If I still wrote checks, I’d be writing 2012 on them.
So if it’s been a while since you’ve looked at your investment portfolio, I know the feeling.
But if you’re in the January spirit, reworking your budget, hitting the gym, and otherwise in a self-improvement state of mind, here are five ways to clean up your portfolio for the new year.
Roll over old 401(k)s
Left-behind 401(k)s are like old clothes in the attic. You say you’re going to sort through them someday, but you never actually go in there, and they end up eaten by fees and moths.
It’s time to consolidate. Make a list of your left-behind 401(k)s (and 403(b)s, 457s, Simple IRAs, and other workplace retirement plans) and find their phone numbers.
If you have an IRA already, call the rollover department at the brokerage where you hold your IRA. Tell them what you want to do, and they’ll get you started.
If you don’t have an IRA yet, it’s time to open one.
Pick a big discount mutual fund company like Fidelity, Vanguard, or Schwab.
Call their rollover department, open an IRA (you don’t need a minimum deposit to open the account if you’re doing a rollover), and the rest is easy.
As for your attic, you’re on your own.
Last year was pretty exciting in the investing world. Stocks had a blockbuster year. Bonds did lousy.
That doesn’t mean you should change your investing strategy—no one can predict what type of investment will do best this year. But it probably means it’s time to rebalance.
Rebalancing is akin to nudging the steering wheel when your car starts to drift off-center.
If you intend your portfolio to be 70% stocks and 30% bonds but it’s drifted to 74% stocks and 26% bonds, sell some stocks to buy some more bonds.
(If you use target-date funds in all your accounts, relax: they rebalance automatically.)
Rebalancing is hard. Not the math—the emotions.
Since stocks did so well last year, it’s tempting to think that means it’s time to buy more of them, not buy the thing that stank last year.
But rebalancing is about controlling risk. You have bonds in your portfolio because, for most people in most situations, 100% stocks is too risky.
Recalibrating your portfolio to your intended level of risk is smart investing, even if it feels wrong.
And what’s your intended level of risk? Better check your investment policy statement.
Reread (or write!) your investment policy statement
One of the least-read columns I’ve ever written was about how to develop an investment policy statement (IPS).
It’s a terrible term, simultaneously intimidating and boring.
So my new year’s resolution for 2014 is to stop saying “investment policy statement” and come up with a new term.
Let’s call it FUP: Foul-Up Preventer. (Substitute another word for “foul” if you prefer.)
A FUP puts your investment principles on paper so when things get weird, scary, or exciting (crash! panic! Bitcoin!) you can remind yourself that you have a long-term plan and no interesting headline should persuade you to deviate from it.
My FUP is one page long. It tells me what percentage of my portfolio to keep in US stocks, international stocks, and bonds.
It warns me to keep fees as low as possible and to avoid active management and market timing. It has probably already prevented some foul-ups.
Cut fees and expenses
Too many mutual funds and 401(k)s charge criminally high fees and expenses.
But the story keeps getting better: the big mutual fund companies and big-company 401(k)s continue to slash fees, slowly dragging everyone else along.
Your 401(k) is required to share thorough information about fees and expenses.
Most plans charge an annual expense ratio for each mutual fund and one or more overall fees for the plan itself.
You can’t do anything about the plan fees other than complain to your benefits office and hope for the best. But you might be able to fix high fund fees right now.
Look at the complete list of funds available in your 401(k). Plenty of plans offer funds charging as much as 1.5% (way too much) alongside comparable funds charging 0.1%.
In other words, they offer the opportunity to pay 15 times the price for the same (or worse!) product.
Look for funds with the lowest expense ratio, probably with “index” in the name. Use them.
As for your IRA, there’s no excuse for overpaying. Simply buy the cheapest, most diversified index funds or ETFs.
Slim down your accounts
Finally, even if you’ve rolled over those old 401(k)s, you may have too many accounts or too many funds in those accounts.
You don’t have to hold 17 mutual funds to be a successful investor. Simple is good.
Look for opportunities to consolidate accounts and to reduce the number of funds you use in each account.
Consider target-date funds or balanced funds such as Vanguard’s LifeStrategy series. Having a whole bunch of funds doesn’t make you more diversified; it just makes a mess.
Sure, I know you’re not going to hit all five points by the end of the month. Me neither.
But tackle even a couple of them, and you and your money will have a happier 2014.