(PUB) Investing 2015

July 2015

Morningstar FundInvestor

17

Mistake 4 | Not Focusing on Tax-Sheltered Accounts for Changes If it turns out that you need to tweak your portfolio— and today, many investors are apt to find their portfolios heavy on stocks relative to their target allo- cations—be careful not to trigger any unwanted tax consequences along the way. That’s particularly important these days, as many investors have substantial gains in their equity holdings; selling highly appreciated positions from their taxable accounts is apt to trigger a capital gains bill. That means that if you need to reduce the importance of a given asset class, sector, or investment style in your portfolio, you’re better off doing so by trimming positions in your tax-deferred or Roth IRA accounts. There, you won’t face any tax consequences as you reduce the value of your most winning holdings. K Contact Christine Benz at christine.benz@morningstar.com

You might get caught up comparing one holding’s year-to-date return with that of another, for example, or spend an inordinate amount of time hunting for the reason why your cash weighting went to 7% from 4% . Things can get even more unwieldy if you have multiple portfolios saved on the site—one for your 401 (k), one for your spouse’s rollover IRA , and so forth. Before you know it, a few hours have gone by, and you’ve barely made any headway in your portfolio- review process. To help avoid that trap, start your portfolio review by asking the basic question, "Am I on track?" If you have multiple portfolios saved on the site, the "Combine" feature (under the "Create" tab in Portfolio Manager) can help you collapse them into a single portfolio that you can use for ongoing monitoring. (If you do so, you can also retain your subportfolios to review separately.) Armed with information about your total balance and savings/withdrawal rate, you can then turn to a basic calculator such as Morningstar’s Savings Calculator—or a more refined one such as T. Rowe Price’s Retirement Income Calculator—to see whether your current portfolio’s value gives you a good shot at reaching your financial goals. If you’re off track on this front, portfolio tweaks might not move the needle; you may need to adjust your savings rate (or your withdrawal rate, if you’re retired) to improve the viability of your plan. When it comes to your portfolio, it’s also valuable to think big picture. Morningstar’s X-Ray tool provides you with many details on your portfolio’s positioning, but the most important determinant of its perform- ance will be your total portfolio’s asset allocation, expressed as a pie chart in the top left-hand corner of the X-Ray view. Compare your current weightings with those of your targets; if you lack targets, use Morningstar’s Lifetime Allocation Indexes or a good target-date series, such as the ones from Vanguard or T. Rowe Price, to check up on your portfolio’s reason- ableness. Also, take notes of any major unwanted sector or style bets.