Spring Cleaning for Your Financial Life

By Kathleen Nemetz, MBA, CFP

Spring is here, and with it the urge to fling open windows, empty out drawers, rake down the yard, and refresh home décor. Whether you are touching up paint or changing the color of a whole room, you are feeling energized by the decluttering and the change.

Why not also channel some of this momentum into the most procrastination prone tasks, like managing your financial life? By the time you have hit the mid life mark, you probably have accumulated too many accounts, too much financial deadwood, and a surplus of underperforming assets.

So, just as you might have created the “honey do” list for your home, the proverbial punch list of tasks like cleaning the roof gutters and chimney, create a quick checklist to put your financial house in order. Until next year....

1) Consolidate accounts. Check out where your money market accounts are sitting in banks and move them into only the amount of locations necessary to still qualify for FDIC coverage on the accounts. Choose the best interest rate and stay there, if cash reserves are really needed. Consolidate 401K balances into the same employer plan or roll them into your managed IRA account. It’s easier to track performance with fewer accounts to track. Your heirs will appreciate the simplification as well.

2) Reduce duplication. Consult with an investment professional or use a professional grade screening tool to determine which of your funds duplicate each other, reducing your diversification. Determine what the diversification gaps may be and take steps to add or subtract the appropriate funds from your accounts.

3) Shave back overweighting by category. If in your analysis with a professional you find that you are far more exposed to any one industry sector thank warranted by your risk profile, grab the hedge trimmers. Cut back as appropriate to move the excess to other categories aiding diversification or lowering standard deviation.

4) Benchmark your yields against cash draw needs, if any. If you need to take 5% from your accounts to finance retirement expenses and your yields fall short, determine if you either need to add to yield – that is, dividends and interest – or produce more appreciation and sell on gains. Taking a disciplined, systematic approach to benchmarking can reduce the tendency to draw down an account over time.

5) Rebalance back to your long term risk allocations. If you and your advisor agreed that a 40 percent allocation to fixed income including bonds was the best way to reduce standard deviation, you will usually need to sell some equities each year to reallocate to the bond category. Over time, stocks may otherwise outpace bonds in growth, and reweight your risk profile more aggressively toward higher standard deviations from the mean.

6) Throw out the junk. If you have assets that have underperformed for years or that no longer serve their purpose, dispose of them. You may benefit from netting losses against gains in a taxable account.

Need help? I recommend checking in with your advisor at least once a year to thoroughly review where the dry rot may lurk in your financial house. Problems are more easily resolved when caught sooner, rather than later. Opening the light onto your portfolios may also give you a new perspective on what’s important to you for their future performance.

Kathleen Nemetz, MBA, CFP

McClurg Capital, 415.472.1445