The snickering because of your holiday sweater has ceased, the presents have been opened, and the decorations have been stored away for another year. It is now time to discuss New Year's resolutions that could help lower your stress and pad your wallet. Here are a variety of ways to get your financial situation in better shape.
Set a Plan.
Determine your risk tolerance—the degree of uncertainty that you can handle in regard to a negative change in the value of your portfolio. Keep your time horizon, spending needs, and other circumstances in mind when determining your risk tolerance to allocate your portfolio assets appropriately.
Pay Yourself First.
Consider investing in your 401(k) at least up to your company’s match. Even if your company is not matching your contributions, you should still be putting some money toward your retirement account. Consider setting your 401(k) contributions to the highest level you can handle (in 2013, $17,500 max for those under age 50; $23,000 max if 50 or older). If you are self-employed, consider talking to a professional about other special tax-saving opportunities, including Solo 401(k) plans, SEP-IRAs, and Keoghs.
Rebalance As Needed.
Depending on your risk tolerance factors, such as your age, income, etc, and portfolio's performance, it may be time to rebalance. When you rebalance, you trim assets that are overweight and use the proceeds to invest in underweighted assets, or you can use new investment dollars to buy underweighted securities. In doing this, you may be able to benefit by buying low and selling high, since often overweighted assets have performed better and underweighted assets should be relatively cheaper. However, tax consequences should be considered before making these decisions.
Review Your Losers.
In addition to reviewing the big picture and your overall asset allocation, you should compare the returns of your individual investments with their appropriate benchmarks. If a holding underperformed its benchmark by 3% to 5%, try to find out why. If that particular investment was out of fashion, it may be worthwhile to keep it in hopes for a turnaround. However, if your investment consistently underperformed its peers for multiple years, you may be better off dumping it for a better long-term performer.
Convert For Tax Free Growth.
While you will be hit with taxes up front, converting a traditional IRA to a Roth IRA will allow your money to grow tax free. As another bonus, there are no required minimum distributions after age 70. This may not be beneficial if you are going to pay too much in tax for converting. This decision should be carefully considered with the help of an investment professional or tax consultant.
William G. Lako, Jr., CFP®, is a principal at Henssler Financial, and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Sundays at 10 a.m. on Talk 920 AM, WGKA.