Mid-Year Financial Checklist - 4 Essential Must-Dos...

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As 2015 is speeding past us like a Japanese maglev train, do you ever get the nagging feeling that there is still a lot left to accomplish? The warm, lazy days of summer tend to slow down that type A tempo inside us, and make us want to take time off, enjoy the weather and further postpone the completion of our goals.

Whether or not you end up accomplishing every single goal you set for the year, I’m going to focus on four crucial items that everyone should make an effort to put in the checked column before we ring in 2016.   

Work Now to Reduce Taxes this Year 

Rebalancing your portfolio by selling stocks may make a lot of sense. Your reasons for doing this will vary, but probably include such objectives as generating cash, profit-taking or selling because the company’s fundamental story has changed for the worse. But be sure to keep in mind that these sales could result in capital gains taxes. 

Given that we are in the fourth longest market bull run in history, and the market hasn’t had a 10% correction in almost four years, now is a good time to analyze your portfolio – and take appropriate action. (See my related post: “Almost 4 Years Since the Last 10% Correction… How Prepared Are You")?

You may as well get some tax benefits for those stock sales by offsetting them with your losers. 

Reducing capital gains taxes.  Evaluate your portfolio and consider selling a long-term holding that’s down, and offset these losses with any capital gains. If you are diversified, you may have some losing stocks. Good ol’ Uncle Sam compensates you for part of that loss. You can use those capital losses to reduce, dollar for dollar, any capital gains you may have elsewhere in your portfolio. And, if you have more losses than gains, you can use them to lower your taxable ordinary income up to $3000 a year. You can also carry forward leftover losses indefinitely, thus lowering your tax bill for future years.  

Take action before you lose the chance. Even though the market is up only modestly this year, losses can be found in various areas including energy stocks (-10.5%), oil stocks (-14.8%), commodities (-34.5%) and emerging market stocks (-10.5%).   

Many investors who want to offset capital gains make the mistake of waiting until the end of the year to harvest losses. No one knows where the market will be in December though, and you may be left with fewer opportunities. 

Maintain your strategy. While rebalancing does reduce risk, it’s imperative you don’t deviate from your investment strategy, which is the makeup of your portfolio. I tell clients that when they do sell a losing stock to offset capital gains, they should immediately replace the losers with the same type of – but not identical – investments. A little IRS rule called the “wash sale” restricts you from buying back the same security you just sold for 30 days if you want to keep the tax break. However, you still have plenty of other valid options to get around this rule. For example, if you sell a company in the oil sector at a loss, you could replace it with another company in the sector that has a slightly different business model, or replace it with a broader-based energy fund. You should consult with your financial and tax advisor to fine-tune your personalized strategy. 

Stress–Test Your Portfolio(s) -   Rising Interest Rates 

The Federal Reserve says it could raise interest rates soon, marking the first rate increase in nearly nine years. History shows that there is an 80% chance stocks will fall by 5% or more, once Fed “tightening” is imminent.  And we know that bond prices move in the opposite direction of market rates, so fixed-income funds could take a hit too.  

My best advice is: don’t overreact.  The smart money thinks that global growth is slow enough for the Fed to be patient. And, according to a survey of economists by Blue Chip Economic Indicators, short-term rates are expected to rise only about a half a percentage point by year-end.   

Review your portfolio with a financial advisor and, if you have longer-maturity bonds, consider lightening up on these and switch over to more intermediate-term maturity bonds, if you don’t already own them. These bonds, with a nearly 3% yield, can soften the blow from price declines.

Try to stay cool with your stocks too. Not all pullbacks turn into bear markets. According to S&P Capital IQ’s Sam Stovall, “history shows most sectors keep rising six months after the Fed starts raising rates, and you’re better off holding on – and sell equities only if you need to rebalance…” 

Don’t Forget to Rebalance

If you’ve been reading my blog for a while, you know I’m a big proponent of portfolio rebalancing. This is critical, especially for those approaching or already in retirement. Yet I still find that far too many investors don’t do it. (See my related post: "Don't Stick Your Head in The Sand When it Comes to Retirement").  Wayne Connors, CEO & Founder of 401kInvestor.com, explains that failing to rebalance your 401(k) is dangerous for two reasons:

“…While stocks generally outperform bonds over the long term, they can be much more volatile in the short term. So you don’t want to find yourself holding more of your 401(k) in stocks just before retirement than you planned, just because the market soared. Otherwise, you might see your portfolio collapse if the market tanks just as you need to start withdrawing money from the plan. That’s one reason why it’s a good practice to rebalance your portfolio every year or two, gradually weaning your portfolio off stocks and increasing your exposure to the more stable bond funds…”

Get back to your target allocation weighting. If you started with 60% stocks/40% bonds three years ago, you’re probably closer to 70% stocks now. Don’t go crazy on this, as rebalancing can trigger trading costs and taxes. Generally speaking, I like to use the 5% rule, which means rebalancing only if your allocation mix has shifted by 5% or more. Essentially, you are selling high and, hopefully, buying low. I strongly advise shifting your allocation back before Mr. Market does the job for you.

Have your “Shopping List”

Keep some “dry powder” (cash) to invest in great companies during the next market pullback. Remember, the basic premise of investing is to buy low and sell high. If your tax situation warrants it, consider taking profits on some of your current positions, so that you can buy-in again at a lower price. My own shopping list is comprised of what I call the “Marius Magnificent Seven” blue chip bucket—a group of seven top-of-class companies that every investor should own in their portfolio(s). I personally own some of these companies in my portfolio and will add to them at lower prices. These are also companies that I have long wanted to own, and will buy during the next correction. (Contact me directly if you’d like more information on these companies.)

Protect Yourself from Identify Theft 

Last year, 25% of Americans were affected by data breaches, according to the American Institute of CPAs. And your chances of getting hit are only growing. Think about newsworthy breaches at Target, Neiman Marcus and the California DMV, which impacted 70 million, 1.1 million and 11.9 million consumers, respectively. Even our own U.S. government hasn’t been immune. 

The average victim of ID theft spends more than nine hours fixing the problem. For those whose personal information is used to open new accounts, it’s closer to 30 hours. This means that if you fall victim to identity theft, fixing the situation and safeguarding against future problems may be the most time-consuming financial issue you’ll deal with this year. 

While it’s nearly impossible to fully protect yourself from identity theft, you can take steps to minimize the risk. Here are some recommendations: 

Be vigilant in monitoring your credit card and bank accounts, and be wary of any emails or calls from people claiming to represent retailers or banks. 

Reduce the number of store charge card accounts you open or maintain. It’s not worth the small discount the store promises you when you first open the account. If the hackers don’t get you, the high interest rate from financing your purchases will. Closing these accounts is typically the best course of action. 

Monitor your credit report every few months to ensure no one is borrowing in your name. You’re entitled to one free credit report per year from each of the three bureaus (Equifax, Experian and TransUnion). Scan it for abnormal activity, such as accounts or credit cards you did not open. 

Whenever possible, set up two-factor authentication on your most important financial accounts. This requires a second bit of information beyond your password to access an account. Yes, it’s a bit of a hassle, but it sure beats the 30 hours it may take to clean up an identity theft issue.   

Guard your information online. These days, many of us do most of our shopping and banking on the web. With all those account numbers and passwords floating around, it’s easy for someone to steal your information and go on a spree.  

• Clear your logins and passwords. This is especially important if you’ve been working on a public computer. Change logins and passwords at least quarterly, if not monthly
• Pay for online purchases with your credit card, which has better guarantees under federal law than online payment services or your debit card 

Consider an identity theft protection service, only after you have taken the steps outlined above to protect yourself. Despite all the press, the odds of having your identity stolen are still relatively low, so consider all factors before you opt for such a service. 

Additionally, there are specialty companies like TrustedID and LIfeLock, which market themselves as identity theft protection experts. These companies offer a mix of preventative tools and alerts to maintain your identity and credit, the most common being credit and fraud alerts.

You may wish to consider one of the products offered by your insurer or banking institution. Today, many banks offer customers daily credit checks that alert them to suspicious activity in their accounts. 

It’s easy to think that living off the grid may be the only solution, and feel tempted to give up on plastic or never make an online purchase. But with the conveniences and benefits of online shopping, this is not the most realistic option. Don’t forget that cash can be lost or stolen with no recourse. Again, the best bet is to use a major credit card, which offers the cardholder better protection if the number is used without his or her authority.   

Consumers need to realize that data security requires them to be prepared and not to rely solely on banks and financial institutions to protect them. For more tips on how to protect your identity, refer to these two helpful articles: 

• Target Data Breach: 9 Ways to Protect Yourself – CBS Money Watch
• Identity Theft & Credit Card Fraud – How to Protect Yourself – Wall Street Journal

Take Better Care of Your Health

Be proactive with your own good health. (See my related post: "The Top 3 Regrets of Retirees - How to Avoid Them Now"). Many people take better care of their cars than their own bodies. We decide there’s no time to work out at the gym because we have too much work to do, and we make earning money our priority. You’ve heard it a gazillion times, but it’s worth repeating…by the time you realize that you should have taken better care of your health, it’s too late.

I come across this ALL the time. People ignore the “warning signs” from their bodies, and then end up facing serious health problems. It’s too bad and, in my opinion, a real disconnect. They work so hard now so they can enjoy the fruits of their sacrifices in the future. But by not dealing with their health issues properly, they end up living with unnecessary pain and suffering. Not to mention the financial and emotional burden they place on themselves and their families. 

The common belief that Medicare will cover the vast majority of healthcare expenses in retirement is a farce. A recent study by the Employee Benefits Research Institute estimates that the average “healthy” 65-year-old couple that retired in 2013 will need about $300,000 in additional savings to cover added medical expenses throughout retirement. And since health issues can be very unpredictable, there is always the risk that medical expenses could be even higher. 

As people age, joint injuries, especially at the knees, hips and ankles, become increasingly prevalent. Tend to these now. Get a prescription for a good physical therapist, even if it’s only for five sessions, who can start you on an at-home/gym regimen. It will make a huge difference in the quality of your life.  

Personally, in addition to jogging, I try to do a few core strength-building exercises 2-3 times a week at home or the gym. It takes very little time, but allows me to maintain my modest jogging schedule with minimal injury. You may laugh, but I knock off 30 quick pushups in the kitchen while my bread is in the toaster. It’s done, and I feel great. I once knew someone who had a pull-up bar in his shower. It was the only time he would ever do these exercises, but he did them religiously every morning! 

Challenge yourself to start, or add to, an exercise regimen. Take a page from Matt Cutts, head of Google’s Webspam team, by embarking on a 30-day exercise challenge (see Matt’s excellent piece titled: Try something new for 30 days).  As it turns out, 30 days is just about the right amount of time to add a new habit (or subtract one). The next 30 days are going to pass you by, like it or not, so why not make the most of them? 

Take the little steps now to care for your body. I’m not saying that doing toaster pushups or shower chin-ups are the right exercise solutions for you, but find what clicks for you, and is convenient enough that you will get it done. Trying something new is the easy part, but staying consistent is the real challenge. Start today. Keep at it. Your physical – and financial – health may depend on it. 

Meanwhile, I wish you and yours a very happy and safe Fourth of July weekend.  

Plan Well, Retire Happy (and Healthy)! 

Michael Martin

About Michael:  Michael Martin is a Principal, Financial Advisor and Chartered Retirement Planning Counselor (CRPC ?) with Marius Wealth Management, LLC  (MWM).  MWM is a State Registered Investment Advisor and serves the investment and retirement planning needs of individuals and families, senior level executives, and small businesses. Get new blog updates automatically by email - Click here. (enter your email in blog update box on upper right) Michael publishes on topics of financial & retirement planning and investment management in his blog at  www.MariusWealthBlog.com .  Follow his tweets @MariusWealth .  Got questions about investing and retirement? Get answers. Send him an email at [email protected]

Opinions expressed herein are those of Michael Martin and/or Marius Wealth Management, and neither Michael Martin, nor any other professional that is quoted in this article is providing legal or tax advice as to the matters discussed herein.  This chart and article is for informational and educational purposes only and is not intended to be a solicitation or offer buy or sell any specific security product, service or investment strategy. The accuracy and completeness of this information is not guaranteed and is subject to change, and is based on current publicly available information from sources believed to be reliable. Since each investor’s situation is unique, you need to review your specific investment objectives, risk tolerance, tax situation, and liquidity needs with your qualified financial professional, tax professional or attorney before implementing any strategy or recommendation discussed herein. Investments involve risk and unless otherwise stated, are not guaranteed.  Marius Wealth Management, LLC (MWM) is a Registered Investment Adviser with the State of New York.