Why Even Long-Term Investors Should Hold Quarterly Reviews

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preparing-for-retirementMany investment advisers say you need to have a long-term perspective to be successful investing in stocks. Warren Buffett says he buys stocks in companies that he intends to hold forever. With this type of long-term thinking, why bother with quarterly reviews?

At our firm, we manage the fixed portion of each client’s investment account using individual bonds that we intend to hold until maturity. The growth portion is invested in mutual funds and exchange traded funds where a high percentage is in passively managed positions. One might think this would make regular review unnecessary. However, we believe the mechanics of investment selection and periodic performance against benchmarks is not the reason for a review.

Here are four very good reasons to review your investment plan regularly, each of which can have meaningful impact on your account.

  1. Manage Expectations
  2. 2014 was the fifth year in a row that the stock market has had positive returns. Many reports in the financial press are predicting the next stock market drop. It would be easy to get swayed into thinking this would be a great time to move to the sidelines, but don’t be fooled – this is just another form of market timing. We remind our clients that their investment time horizon is their life expectancy. The stock market may or may not decline in 2015. Their investment strategy is not based on successfully predicting the next decline. What it is based on is maintaining the correct allocation for their financial plan in good markets and bad. The review session provides an opportunity to remind clients there is a plan in place and a strategy for achieving success over the long term.

  3. Monitor Spending
  4. Running out of money is a substantial concern for many retirees. Poor investment performance, inflation, medical costs, etc., are a few reasons why people think they might not have enough money. However, my experience has taught me that overspending is the most common reason why retirees run out of money. One skill that helps people to be financially independent is learning to live below one’s means. You can’t spend everything you make and expect to have enough wealth to last through retirement. This is true even after you retire. You can’t spend all of your investment earnings. Some of the earnings must be reinvested so the portfolio can continue to grow to keep pace with inflation. Since investment returns can vary greatly from year to year, we advise clients to adhere to the prudent withdrawal rate. Review sessions are a good time to review the amount of distributions a client is taking to determine if this rule is being followed. Occasionally taking withdrawals larger than 4% doesn’t usually harm portfolios in the long run but continually exceeding this amount could.

  5. Plan for Taxes
  6. Income tax considerations should not drive investment management but it is an important consideration. Review meetings are an excellent time to evaluate the outlook for capital gains and other sources of income. Our review meetings include tax projections for the current year, where we evaluate the impact of taking capital gains. Roth conversions are also discussed to determine if moving money out of tax-deferred accounts would be tax smart in the current year. The projection will also review whether the client is on track to have enough tax withheld or paid through estimated tax payments to avoid the underpayment penalty.

  7. Meet Charitable Giving Goals
  8. Clients who are charitable minded can benefit from combining portfolio management and their charitable giving goals. Gifting appreciated assets that have been held longer than one year are an excellent way to manage capital gains. There is a good chance the portfolio will be over weighted in appreciated positions. The client can gift over-weighted positions rather than selling them. The appreciated value of the asset becomes a charitable tax deduction while rebalancing the portfolio. A donor advised fund (DAF) can be set up to make this strategy easy to implement. The DAF can be funded when the portfolio needs to be rebalanced. The client can decide at a later time which charity will ultimately receive the gift.

The review meeting is ultimately more about financial planning than just reviewing investment strategy. It facilitates good communication between client and adviser that should minimize surprises. As a result, the portfolio should perform more efficiently, which should also help minimize income taxes.

Rick’s Tips:

  • Long-term investors should still have regular reviews with their adviser to communicate about a variety of financial issues.
  • Overspending is one of the biggest retirement mistakes. Monitoring spending should be covered during a review.
  • There are many opportunities for tax efficiencies when investment management is incorporated with tax planning.

Will Your Money Last Through Retirement?

No one wants to run out of money. But without goals and a solid plan,
how can you know for sure whether you’re on the right track?

Will I be able to maintain my current lifestyle?

What will my monthly income be in retirement?

Can I protect my hard-earned savings and still
have the income I want?

Rodgers & Associates answers questions like these every day.

Get Personalized Answers
2025 Lititz Pike, Lancaster, PA 17601
Phone: 717-560-3800, Toll-Free: 888-876-3437