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By Mallika Mitra
December 14, 2020
Chris Gash for Money

With 2020 (finally) coming to a close, there are probably many tasks you’re trying to finish before the New Year — and checking on your investment portfolio should definitely be one of them.

This year was unlike any other. Millions of people lost their jobs due to the pandemic, the government issued emergency stimulus money (which wasn’t enough) and Joe Biden became our president-elect. Stocks plummeted in March before reaching record highs just months later. Many experts recommend that you reevaluate your portfolio quarterly and rebalance once or twice a year. With all the changes that you and your investments might have experienced, it’s especially important to evaluate your holdings this year.

Here are two ways to check that your portfolio still matches your needs.

Do you have too much cash on the sidelines?

The stock market volatility may have scared you earlier this year, but if you were one of the many who pulled money out of the market, make sure not to leave it there. Keeping your money on the sidelines could really hurt your returns — if you missed out on the market’s top 10 days over the last two decades, your overall return was cut in half, according to J.P. Morgan Asset Management’s 2020 guide to retirement.

You should keep only enough in cash to cover your emergency fund and your short-term goals, says Jeffrey Corliss, managing director at RDM Financial Group in Westport Conn. Short-term goals include expenses that could come in the next year or so, like a child’s wedding you are helping pay for. But if you’re going to buy a vacation home in four years, or retire in 15, stay invested, as you have the time to ride the market’s ups and downs, Corliss adds.

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Inflation — or the need for more money to pay for the same goods or services overtime — is a concern as we age. In October of 2000, $1,000 had the same buying power as $1,496.48 in October 2020 according to the Bureau of Labor Statistics’ CPI Inflation Calculator. On top of that, inflation for health care tends to rise higher than inflation for other goods and services, at around 5% per year. But leaving your money in the market will help you keep up with rising medical costs.

Managing this all comes down to having a solid plan in place and sticking with it.

“Part of peoples’ failure is the behavioral part — making poor decisions in stressful times,” Corliss says. “Having a financial plan will keep guard rails around their financial decisions and help them not have knee-jerk reactions.”

Does your asset allocation still match your needs?

Part of that plan is having an appropriate asset allocation in place, which will ensure you have a diversified portfolio. That way, if one part of your investments suffers, it doesn’t tank your entire portfolio. When the market inevitably takes a downturn, you won’t have to panic, change course and possibly miss out on some gains.

Your asset allocation comes down to one main question: how much risk should you take on? Of course, this is different for every person. Workers in their twenties just starting out their careers have a much different financial situation and investment goals than pre-retirees.

The old rule of thumb was to subtract your age from 100 to find the percentage of your portfolio that you should keep in stocks. That has shifted to 110 minus your age. But for a more precise, customized calculation, there are tools that can take into account additional important factors, like when you actually plan to retire and if you have any other sources of retirement income, like a pension plan, says Joseph Guyton, principal of The Guyton Group in Portsmouth, N.H. Investment companies like TD Ameritrade and Vanguard often have calculators you can use.

Some experts like a blend of about 60% in stocks and 40% in bonds for those who are retired or within five years of retiring, 70% stocks and 30% bonds for those between five and 10 years out from retirement, and 85% to 95% in stocks and 10% to 15% in bonds for those 10 years or more out from retirement, Money has reported in the past. Others prefer a more conservative approach when you’re within 10 years of retirement: 30% or less exposure to equities, reducing that as you get closer to retirement.

If after reassessing your asset allocation you find that it no longer aligns with your target, it’s time to rebalance — that is, buying some securities and selling others until you are back to your target mix of stocks and bonds. Keep in mind that if you’re invested in target-date funds, the fund manager will automatically do this rebalancing for you.

In short: ask yourself how this year has impacted your financials. If you lost a job and need cash to live on, that could be a reason to take some equity off the table and be more conservative in a non-retirement account, Corliss says. (You’ll have to pay a 10% penalty if you withdraw retirement funds before age 59½, but penalty aside it’s a good idea to leave those funds alone until retirement if possible.) Whatever your specific situation is, checking your portfolio before the end of the year will help your future self stomach inevitable market volatility.

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