Provide Regular Care And Maintenance
If you want to keep your teeth healthy, you know regular checkups that include X-rays and a cleaning are required. Similarly, a portfolio requires regular care and maintenance in the form of rebalancing and tax management.
To make sure that the market’s movements don’t cause your asset allocation to drift too far away from its targeted levels, you should check for the need to rebalance on a regular basis. It is just as important to check for the opportunity to “harvest” losses for tax purposes.
Like rebalancing, tax management is a year-round job. Far too many investors wait until the end of the calendar year to look for opportunities to harvest losses. Opportunities should be checked for throughout the year, because losses that might exist in January could disappear by December. In addition, it can be important to realize any short-term losses before they become long term.
Just as the regular care and maintenance of your body gives you the best chance of living a long life, regular care and maintenance of your portfolio gives you the best chance of not outliving your portfolio. Quality medical advice can be indispensable, and so can quality financial advice.
In summary, choosing a financial advisor with the same level of care you would choose a good doctor will greatly increase the odds of achieving your financial and life goals. If you decide to hire a financial advisor, be sure that:
- They are educators.
- The only thing they are selling is advice, not a product.
- They provide a fiduciary standard of care.
- Their advice is based on science—evidence from peer-reviewed journals—not opinion. Relying on science and evidence will prevent mistakes that occur when decisions are based on anecdotal evidence. For example, “George smoked cigars all his life and never got cancer” or, similarly, “My brother-in-law made a 100 percent return buying Internet stocks.” That doesn’t mean it’s a good idea for you to smoke cigars or buy only Internet stocks.
- Their investment plan has been integrated into an overall financial plan that includes estate and tax strategies.
For those further interested in this subject, I recommend reading Meir Statman’s “What Investors Really Want.” It’s one of the best books I’ve read on the subject of behavioral finance.
I would like to thank my internist, Dr. David Walden, for his many contributions to this article.
Larry Swedroe is the director of research for the BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.