March 10, 2014

When was the last time you looked at your non-real estate holdings? If it has been more than a year (or you can’t remember), now is the time to dig out your statements and take a deeper look. There are new tax brackets and changes on how investment income is treated this year. Not only “what” you’re invested in, but “how” you’re invested matters more than ever. Here are a few easy tips when evaluating your liquid investment portfolio:

  1. Do you have an Investment Policy Statement (IPS)? This statement provides the structure of rules around your investments. Typically, an IPS will state the investment strategy, which investments are allowed/disallowed, target rates of return, and allowable risk. An IPS also has guidelines on expenses and how to hire/monitor/fire investment managers.
  2. Look at your asset allocation.How much do you have in US large company stock, US small company stock, international stock, short-term bonds, high yield bonds, cash, etc.? Is there a strategy to this mix? Is it tax efficient and are the assets in the most tax-efficient vehicles? For example, it may make sense to place your income-producing investments (such as bonds) inside a retirement account. If you are in a high tax rate, you may be paying up to 43.4%1 income tax on the investment income from taxable accounts.
  3. Know your expenses.Investment expenses are usually deducted on a quarterly basis. These expenses don’t necessary come out in your December statement, so you may need to look back a few months to figure this one out. You may also have additional expenses inside mutual funds, hedge funds, trading expenses or other semi-regular expenses.
  4. Know your rate of return. Be careful. Make sure that a performance review shows portfolio return after fees since this can be very different than returns before fees.
  5. Use appropriate benchmarks. This goes back to asset allocation. You should compare your portfolio return to a blended benchmark with a similar risk level. This means that if you have a portfolio that has 50% US large company stock and 50% cash, you should compare it to the return of 50% S&P 500 and 50% T-Bills. So, you may feel great if your portfolio went up 15% in 2013, but if you were 100% invested in US large company stock you underperformed the 31.9% return that was enjoyed by the S&P 500. It’s important to compare apples to apples.

Each investor is unique and there are several techniques that can be used to evaluate and build a liquid portfolio that complements your real estate portfolio. The next step is to make an appointment with your tax advisor or Clark Nuber professional to understand your specific tax situation.

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This article contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.