It’s been a nerve-racking year for investors. Almost four months ago, experts declared the end of the bull market after a series of drops. Yet after the stock market plunged almost 35%, investors saw a speedy recovery. The second quarter finished strong, nearly erasing the damage from February and March. Now that the markets are holding steady—for now, anyway—it may be a good time for a portfolio checkup. You can do it yourself by following these steps from Morningstar.
Start with your emergency fund
If your job has been impacted by the pandemic, you may have already dipped into your savings to cover the basics. But if your income has been steady, now is a good time to add to your accounts. While experts suggest building an emergency fund to cover three to six months of expenses, any amount helps. Even $500 or $1,000 in a savings account could help you avoid using high-interest credit cards in a pinch.
Review your overall plan
Your investing goals are unique to you. You may be saving and investing for a down payment, a college fund or for retirement. So start by reviewing the progress you’ve made toward your goals, including how much you have saved in 2020. Morningstar says saving 15% of your salary is an excellent baseline—and 20% may be more appropriate for higher earners. Fidelity offers some basic retirement savings benchmarks here.
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Check your assets
After a high-level overview of your plan, you can review your portfolio. You can use Morningstar’s Instant X-Ray for a free breakdown—aka your asset allocation. This will show your percentages of stocks, bonds and cash.
If you don’t already have an investment policy statement, consider writing one. Your statement can serve as your roadmap for future decisions. It may include target benchmarks—which factor in your risk tolerance and investment timeline—for each percentage of assets. This chart may be handy for determining retirement asset allocations. Morningstar has some sample portfolios here, too.
Consider rebalancing
After a volatile spring, your asset allocations may be off from their original benchmarks. For example, when the stock market does well, your stock percentages may be too high. You can fix this by rebalancing—selling some of one asset type and buying more of another.
Before making changes, though, always consider the tax consequences. You should focus on rebalancing the investments in your tax-sheltered accounts—like your 401(k) or IRA—to avoid a tax bill next April. If your taxable account, like your brokerage, needs rebalancing, top off the weaker allocation as you save and invest more money over time.
