A 20-minute review like this one, done monthly or at least quarterly, will give you peace of mind from knowing exactly where you stand financially and allow you to adjust accordingly with swiftness and confidence.
Most men treat their investment portfolios the way they treat loose change: The money's all scattered around, tucked away here and there; some of it's right where we need it, and some of it's under the sofa cushions.
Consider your own portfolio. Chances are, you've spent the past 15 or more years investing, securing assets, and building substantial wealth. But do you really know what you have, where it is, and how it has performed?
With stocks you can't even remember buying and money-market funds with various brokerages, it's easy to join the throngs of disorganized, careless investors. Just 21 percent of active investors regularly review account statements, read prospectuses, check out the backgrounds of their brokers, and have a financial strategy, according to a poll of 2,000 people conducted for the federal Securities Investor Protection Corporation.
Not staying on top of your finances is a major source of mental (and marital) stress. Who needs that? Here's a simple strategy to organize your financial life and improve the health of your wealth in just 20 minutes.
KNOW WHERE YOU ARESit down at a large table with all of your financial statements, and list your assets on a legal pad. Be as exhaustive as possible: Review such holdings as money-market funds, 401(k) earnings, and college savings accounts.
CountAdd up the number of mutual funds you own. According to the Investment Company Institute, the average American investor holds four mutual funds. How many do you own? Double that? Triple? That's a red flag that your portfolio may be spread too thin. And you may find you have duplicate investments with several brokerages.
ConsolidateIf, for example, you own several money-market funds in different brokerage houses, take a few minutes to move all of those liquid assets under the same roof. It takes just a phone call or Web order. Not only will you find your assets easier to track, but you may also save some money on annual fees. For instance, Schwab charges $45 per quarter for basic accounts worth less than $10,000 -- evidence of how maintenance fees from a few investments scattered about can add up. Look to consolidate other holdings, such as stocks, funds, and bonds, so they're less expensive and less time-consuming to follow.
GET RID OF PAPERHave your account statements delivered via e-mail rather than snail mail. It takes just a few minutes to authorize paperless delivery, and it's a smart choice. Why? First of all, you'll save time by avoiding bales of paper statements that you'll eventually have to shred. If you can download your electronic statements into a financial-planning program (a solid one is Quicken 2006), tracking progress and potential problem areas becomes much easier and more time-efficient.
Second, now that identity theft tops $52 billion annually, digital transactions are safer than paper ones. According to a recent study by Javelin Strategy & Research, of Pleasanton, California, more than 68 percent of reported identity-fraud incidents are paper based, while less than 12 percent originate online. Reasons: It is harder for thieves to access Internet-based data, and online accounts tend to be checked more often, which nabs thieves sooner. "Shredding is overrated. All thieves have to do is go through your mailbox or garbage cans to get documents," says Javelin president James Van Dyke. "When you cut paper use, you cut that risk."
SET BENCHMARKSToo many of us invest and save without a firm grasp on what we want to achieve. If that's you, earmark those objectives in detail. Be exceedingly specific. If, for instance, you're worth $500,000 now, set a goal of reaching $600,000 in 5 years. "The more detailed your objectives, the more focused your plan will be," says Jason Papier, a Sunnyvale, California, financial planner. "Money is an enabler, but you need to know specifically what you want to accomplish." Use an online calculator like this one to see what rate of return and additional savings you'll need to reach your goals.
If you have kids, don't just "save for college." Instead, figure out how much of the cost you will likely have to bear. Start by estimating future college costs by institution with the Princeton Review website. The site can also help you determine your chances of securing financial aid.
PUT OUT THE DOGSThe funny thing about mutual funds is that the "growth" fund you bought 15 years ago may have become a lot more conservative with age. Even worse, a fund heralded as a champion at one point may have turned into a dog. Case in point: Fidelity's Magellan fund was an Oprah-like celebrity with world-beating returns in the 1970s and '80s. However, Magellan has lagged the S&P 500 by 2.5 annualized percentage points over the past 3 years. "It's an 'index hugger,'" says Shannon Zimmerman, the advisor behind the Motley Fool Champion Funds mutual-fund newsletter service. "The very small bets it's made relative to the S&P haven't panned out."
X-ray your fundsMorningstar.com has a free service called "Instant X-ray" that'll give you a detailed picture of a fund's holdings and overall investment approach. Run stocks through it as well as 401(k) holdings.
Check for overlapServices such as Morningstar help you not only dissect what you own but also uncover investments that are too similar. If nothing else, having too many similar holdings goes against the basics of diversification. "Many mutual funds and 401(k) portfolios have overlapping securities because money managers are always chasing 'hot ideas,'" says Lyle Wolberg,
of Telemus Wealth Management, in Southfield, Michigan. "You may find that your 10 different funds own virtually the same stocks."
Look out for investor bloatA well-managed fund will often close to new investors. If your fund continually accepts them, beware. The performance of certain types of funds can be affected if they are constantly taking in new money. Call your fund company to check which of your mutual funds are still open to new investors.
Track performanceSee how the fund has grown in assets since you bought it. Even funds that are not closed can be solid performers, provided they simply haven't gotten too big. Ask your broker or the fund company for the size of the asset base at inception and the fund's current size. Then check the concentration of holdings. "It's more art than science, but generally speaking, the more concentrated the fund's portfolio is, the more the size of its asset base can create a drag on the fund," says Zimmerman. "When the fund becomes too large and lethargic, it's difficult for managers to stake out meaningful positions in off-the-beaten-path equities. Few will take that risk."
Compare costsWhen shopping for funds, utilize new Web sites that make it easy to compare expenses. The National Association of Securities Dealers offers free tools, including the Mutual Fund Expense Analyzer and the Mutual Fund Breakpoint Search Tool, the latter of which allows you to search for commission discounts. Likewise, indexuniverse.com is a free site that offers a function for screening index funds and exchange-traded funds (ETFs).
BUILD "SILOS"Now is the time to build financial "silos." Like agricultural silos, in which farmers store specific types of grain, these are logical groupings that match investments, assets, and risk to particular financial objectives. Often, as we accumulate investments and assets, we latch on to holdings that are attractive but really don't match up with a genuine objective. Grab a sheet of paper and list the specific investment goals you identified earlier, such as planning for retirement or owning a vacation home. Then match up every investment and asset to one of those goals. If some of your investments lack clear objectives, that's another powerful argument for change.
Building silos for all of your goals can efficiently assess the need for adjustments and also avoid critical mistakes, such as assigning aggressive investments to a goal that doesn't mandate high risk. "It's a fast way to delineate risk and return," says Wolberg.
BOOST RETIREMENT SAVINGSMost financial planners recommend that households be ready to replace 85 percent of their annual preretirement income each year during retirement. If you own a business, ask your financial advisor to look into 412(i) plans, which have significantly larger contribution limits than do other programs, as well as some tax advantages. To learn more, click here.
Consider a variable annuityIf you are an employee and have already maxed out contributions to your 401(k), look into funding an annuity. Your earnings will be tax-deferred, and you'll eventually receive a series of payments for the rest of your life.