The days are getting longer, the weather is getting warmer, and nature is blooming. It can only mean one thing: Spring is here. For some, that means it’s time to show your backyard some love or get fit for summer — but this season of renewal can also be the perfect time to “spring clean” your investments.
With tax season wrapping up, it’s the perfect time to assess where you’re at with your finances and get them in order. Let’s run through some of the best ways to do exactly that.
If we asked you (or just about anyone) if they’d prefer to invest in a high-performing or under-performing stock, it’s a given that they’d choose the high performer. Yet when it comes to the reality of our own portfolio, we often have an irrational tendency to hold onto assets that aren’t doing well. This is known as the “sunk cost fallacy.”
Maybe it’s because you invested in a private equity fund in good faith and are holding on so you can be proven right eventually. Perhaps you’ve invested in something for so long that it seems too late to let go now.
But the important thing here isn’t to psychoanalyze why you’re choosing to cling to an underperformer in the first place — it’s to change your ways. If you were advising a friend who had your portfolio, would you suggest they sell their worst-performing assets? If so, you should probably do the same for yourself.
Note that when we’re talking about “underperformers,” we’re not just talking about assets that have given us a negative return, but also those that have underperformed relative to the rest of the portfolio (even if they still produced a positive yield).
It might not be exciting or glamorous, but getting your paperwork in order is a must. Gather together your documents and statements from financial institutions to ensure everything is in check. Are there any accounts you’ve forgotten you had? Any interest charges or fees you’re paying that could be avoided?
When you’re collecting all this info, you might also find you have your money distributed across more accounts than you realized, suggesting that it’s time to tidy things up by restructuring your finances more logically. Do you really need three accounts if one could achieve the same thing?
One of the first rules of investing is to keep a diversified portfolio. Spring is a great time to check what you’re invested in and see how many industries it covers. Plus, with inflation and Fed rates soaring, it’s more important than ever to check your portfolio contains assets that will be less affected by these conditions (such as real estate, the classic inflation hedge).
The value of diversification applies not just to your assets themselves but also to your investing strategies. Many investors tend to feel an affinity with a particular investing style, such as trying to pick high-growth companies or opting dividends. But it’s best to take an impartial look at what you’re doing. Maybe it could be time to try a new approach?
Even if your portfolio was perfectly balanced and diversified when you first created it, time changes everything. In most cases, as some assets yield great results and others underperform, our portfolio can skew in the wrong direction.
For instance, you might have initially invested 5% of your portfolio in real estate to avoid risk exposure. But over time, if a property ended up rising in value by 50% (which isn’t unheard of for high-demand areas over the last few years), you could end up in a situation where real estate makes up 25% of your portfolio instead of 5%.
If this isn’t what you were hoping for initially, it’s best to sell a percentage of the assets that have become skewed and invest that money into safer holdings to rebalance your portfolio. It might be tempting to hang on in the hope of continued growth, but remember — you chose to give these risky assets less precedence for a reason.
Although your first priority should be checking your investment portfolio is well-structured, gains from investments aren’t the only thing you need to worry about — there are also some serious gains you can have by optimizing your portfolio for taxes.
A major part of this is choosing tax-efficient accounts. Have you maxed out your IRA and pensions? If not, it might be time to reallocate some of your funds.
If you don’t have any kind of system, it can be a time-consuming process to carry out all of the above. But there’s one simple step that could make everything else easier: Staying on top of your finances along the way.
For instance, Vyzer offers tools to help investors track their assets. You’ll be able to tick all the boxes outlined above by seeing a breakdown of your investments, how they’re distributed across different asset classes, and visualize what would happen in various different situations (e.g., a crash). This also makes it much easier to review how far your investments will take you in the future.
If you’ve decided it’s time to spring clean your finances, it can be as simple as tracking what you’ve achieved so far or as complex as undergoing a complete rebalancing. The most important thing is simply to look at where you are right now — and to take some kind of action if you’re not completely happy with the answer.
Consider using Vyzer to help you along this journey. Just connect your accounts, and you’ll be instantly presented with visuals and tools to get your finances in order.