If a knowledgeable observer trained his or her sights on my choices, what are the trouble spots they would identify? Here are some of the biggies.
If a knowledgeable observer trained his or her sights on my choices, what are the trouble spots they would identify? Here are some of the biggies.
I hold too much employer stock
I understand the tax implications of this, so I might as well sell each lot ofrestricted stock unitsas soon as it vests because there’s no tax benefit to hanging on longer. And it’s not like I think I possess some inside knowledge that the shares are likely to outperform the broad market.
Instead, the key culprit here isinertia. There’s a little bit of tax dread mixed in, too, as selling them would trigger abig tax bill. I’ve been in the process of divesting fromcompany stockfor the past several years, but the allocation is still high.
I hold too much cash
Even when cash yields are higher, as they are today, inflation still gobbles up most of the interest.
Cashhas stacked up in our account following bonuses or other windfalls, or during fallow spending periods like 2020. And it just never feels like an especially great time to move the money into long-term investments.
Perhaps most important, having cash on hand confers valuable peace of mind. I like knowing that almost anything could happen, and we’d be able to cover it without touching our long-term investments. I think of cash as one of myluxury goods.
I don’t hold much in bonds
My husband and I should have a good slug of retirement assets in fixed-income investments at our life stage. But our portfolio is oddly barbelled, with a healthy dose of cash alongside a long-term portfolio that’smainly invested in equities.
In a way, I think the cash and the equities work together from a psychological perspective, with the liquid assets giving us peace of mind to stay the course with stocks.
But the lack ofbondsisn’t really deliberate. Instead, inertia is probably the main reason. We set up our long-term portfolios with heavy equity allocations in our 30s, and we’ve never really wavered. But this is something that I’d like to address as retirement approaches.
I don’t have a perfect record with ‘asset location’
There’s a fantastic fund I own—but in ourtaxable brokerage account. If I could do it again, I’d buy this fund in a tax-sheltered account, because it has made some significantcapital gains distributionsover the years, which have boosted our household’s annual tax bills.
Asset-location problems can be difficult to fix. Even though ourreinvestedcapital gains have helped boost our cost basis, we would still owe a big tax bill if we liquidated the position because of the fund’s gains.
I’m slow to make IRA contributions
Ideally,IRA contributionswould go in right around the first of the year, to benefit from tax-sheltered compounding for a longer period. And our IRAs sit right alongside our taxable brokerage account, so transferring funds from the brokerage account to the IRA and converting them to Roth is simple.
But I’ve sometimes made thoseIRA contributionsright before the deadline, a full 15 months later than when we were first eligible to make them. I’ve also been slow to make theconversions to Roth, periodically letting a few years’ worth of contributions stack up in our IRAs before converting.
The baby bear market of March 2020 provided a good opportunity to convert all the traditional IRA assets to Roth with no tax repercussions. I’ve been walking the straight and narrow—with timelycontributions and conversions—ever since.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go tohttps://www.morningstar.com/personal-finance
Christine Benz is director of personal finance for Morningstar.
Christine Benz Of Morningstar, The Associated Press