Improve Your Investing--and Your Christmas

Reviewing your investments at the end of the year is a good idea but here's a better one: Do it now

Gregg Wolper 6 December, 2012 | 7:00AM
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For those of us who feel as if 2012 began just a few weeks ago, it's hard to believe the end of the year is approaching. But the calendar doesn't lie. Many investors view late December or early January as the ideal time to take a broad look at their finances as part of an annual or semiannual review. That's a good idea in a way--it's preferable to ignoring your investments--but here's a better one: Do it now.

Why? Mainly because the period from mid-December through to the first part of January is typically the most hectic and exhausting time of the year--even if it supposedly includes some time off work.

Vowing to review your investments in the year's final weeks might sound reasonable in theory. But in practice, you're likely to be scrambling to find last-minute gifts, dealing with children or grandchildren unencumbered by school, rushing to finish final work projects, and planning and packing for holidays. Perhaps by the time your investment review comes up on your schedule, you'll already be off to some destination where the exact percentages of your pension plan allocations are, to put it mildly, not at the top of your mind.

Those aren't the only reasons to consider moving up the timing. With the spotlight still firmly on the eurozone's sovereign debt crises, related austerity measures, and lacklustre global growth outlooks, media outlets continue to brim with debates and explanations about the potential effects on financial institutions and individual investments. While it's helpful to be wary about advice to make substantial changes in your portfolio based on short-term occurences, a lot of the discussions about international investing and other issues do contain helpful information along with the speculation. At the very least, the wealth of talk about such matters can focus your attention on topics that may be far from your thoughts in a month or two.

Rebalance and Review at Your Leisure
Any evaluation of your investments would benefit from having more time to do it. Before you can rebalance your allocations, you have to find out how far the percentages have strayed from your targets (if you have them) and then decide whether those discrepancies are wide enough to merit taking action. At the same time, you must decide if your target allocations still meet your needs. Although target allocations shouldn't be changed too often--that would defeat the purpose of having a target--it won't do to simply keep the same numbers forever without even considering if they remain appropriate.

Besides the rebalancing issue, a thorough review also includes evaluating the individual holdings in your portfolio, to see if they still offer what they did when you bought them. For funds, several questions would arise. For example, does your small-cap fund still own small caps? Are all the managers to whom you entrusted your money still in the same roles at the same funds?

Much better to do such research during the next few weeks, rather than trying to wedge it in during or just after the holiday season, when too many other priorities are competing for your time. If you feel rushed during your portfolio review, you may make poorly considered changes or, conversely, stick with the status quo simply out of inertia and exhaustion rather than logic.

Won't You Be More Fully Armed Later On?
But wait a second, you might say. If these decisions are so critical, why not wait until year-end, when more information will be available? Because in reality, little information of importance will arrive between now and the new year. 

In the meantime, if you want to check basic facts about a fund's allocations or its top-10 holdings and see who the manager is, typically you can find that information at any time either on or on the fund's website, updated monthly or quarterly. In short, you likely know as much about your funds now as you will in middle or late December, or even in January.

True, by doing your investment review now, you won't be able to examine full-year performance and ranking figures for 2012. But it's hard to argue that such numbers are necessary for your purposes. After all, calendar years are arbitrary periods to measure fund performance. The trailing 12-month period through to the end of November is no more or less useful than performance for the official calendar year. More importantly, a decision that might be altered by four weeks of performance one way or the other probably isn't a decision grounded in solid reasoning. It's more helpful to focus on longer-term numbers that aren't as affected by a brief stretch of returns.

So, get out the laptop, the spreadsheets, or the manila folders and get started. Look on the bright side: You'll not only make better, more carefully considered decisions, you'll also be more relaxed over the holidays, knowing that this important task is out of the way.

Read more in Portfolio Rebalancing Made Simple.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Gregg Wolper  is an editorial director and senior fund analyst at Morningstar.