Published September 2004

Ready for a portfolio review? What to expect

You may reach a point at which you think you’re doing everything you should with your investments — and then you’ll find that things have changed. Maybe your family situation is now different. Or maybe you’ve discovered that your portfolio has somehow evolved into something other than it once was. In short, things don’t always stay the same. And that’s why you need to conduct a portfolio review at least once a year.

If you work with an investment professional, he or she should have a particular method of evaluating your holdings. At a minimum, every good review should examine the following questions:

Is your portfolio properly diversified? Over time, your portfolio may have become “unbalanced” — even if you didn’t do a thing to it. You may have started out with stocks making up, say, 60 percent of your investments. But during a strong bull market, your stocks could have gained so much value that they now make up 70 percent (which means you could be taking on more risk than you’d like). Conversely, during a long bear market, your fixed-income holdings, such as bonds, could take on an increasingly greater percentage of your portfolio’s value, so that you risk losing some of the growth potential you need. By reviewing your portfolio annually, you can see what adjustments you should make to achieve a suitable level of diversification.

Of course, your definition of “suitable” will change over time. When you’re young, you can afford to invest more aggressively. But, as you draw closer to retirement, you might want to become somewhat more conservative to protect the gains you may have achieved. Consequently, during your annual portfolio reviews, try to determine if your risk level still fits your time horizon.

Are your investments performing as they should for you to reach your long-term goals? If you put your portfolio together carefully, you planned on individual investments achieving rates of return strong enough to help you meet your long-term goals. So, if some of your investments are consistently lagging, you may need to replace them. Also, are you paying too much in investment taxes? As you examine your portfolio each year, try to spot opportunities to reduce your investment taxes, which can diminish your “real” rate of return.

For example, as a result of recent tax law changes, taxes on most stock dividends have been reduced to 15 percent; previously, these dividends were taxed at your individual tax rate. You may now be able to integrate more dividend-paying stocks into your portfolio, thereby achieving some tax benefits. Your tax adviser can help suggest other ways in which you could cut your investment taxes.

Have you recently experienced job or family changes? Your employment and family situations will clearly affect your investment strategies. If you’ve taken a different job, you may have a whole new 401(k) or other employer-sponsored plan to incorporate into your portfolio. And if you’ve just married, or had a child, you may need to adjust your investments and/or insurance coverage to reflect some important new objectives related to dependents, home financing or college savings.

By exploring these and other questions during a careful portfolio review, you can help make sure you’re “gaining ground” toward your key financial goals — year after year.

Eric Cumley is an investment representative with Edward Jones Investments at 1201-C SE Everett Mall Way in Everett. He can be reached at 425-353-2322. Edward Jones is an NYSE-member investment firm with more than 9,000 locations nationwide.

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