A Fresh Look

With tax season behind you and holiday spending months away, summer is one of the best times of the year to review your portfolio. And according to Mark DeVries, Financial Consultant at First Midwest Financial Network, this year it’s more important than ever to do a mid-year portfolio review.

“You should re-evaluate this summer, especially due to the market uncertainty of the past 18 months,” DeVries says. “People have been through a lot. Things are stabilizing a little bit more, and people can take a breath now. They need to take a step back and re-evaluate how they are going to proceed.”

Looking Ahead

The first step to altering your portfolio is to assess the market’s direction. According to DeVries, the market probably won’t see substantial returns in 2010. “We saw nice double-digit returns in 2009, but I don’t feel we’re going to have the same type of returns this year,” he says. That’s because job growth has been slow, and will likely remain slow for the rest of the year.

“Job growth is going to be a big issue, probably the biggest issue our government is going to face in the next few years,” DeVries says.

In addition to the job market, DeVries says tax rates also could affect the market going forward. “Our deficit has ballooned, and we’ve got to pay for the spending that we’re doing,” he says. DeVries predicts changes to the capital gains tax, as well as local and state tax rates.

So how should investors respond to these changes? It depends largely on three factors: risk tolerance, time frame and life-changing events.

Risk Tolerance

In light of the market turmoil over the past 18 months, many investors have lost their appetite for risk. DeVries says even young investors, who are typically more willing to take risks, are becoming more skittish about market risk.

“I think people really need to re-evaluate what risks they’re willing to take, especially after what we went through last year,” he says. “They need to ask themselves, ‘What risks am I willing to take? What’s a realistic return?’”

In this new market, returns might remain lower than in the past, DeVries says. Just a few years ago, it was reasonable to expect a double-digit rate of return over 10 or more years, but today, downsizing may be the norm.

“People are going to have to be more cognizant of what kind of return to expect as they look at their portfolios from here on out,” he says.

Time Frame

If you’re about to retire, just retired, or have been in retirement for a year or two, you need to assess your income, expenses and savings because of the affect current interest rates will have on your portfolio, DeVries says.

“I don’t think we’re going to see a rapid rise in interest rates,” he says. “Clients accustomed to high yields on a CD may see yields lower in the next few years.”

These clients need to figure out new ways to supplement the income they are used to receiving with previous yields. Or, they need to re-evaluate their retirement.

“People need to reassess what the term ‘comfortably’ means to them,” he says. “Is that two rounds of golf everyday and lunch at the country club? Or is it downsizing into a smaller home and living comfortably, but not necessarily extravagantly?”

Life-Changing Events

Life events – from getting your first job, to having a baby, to entering retirement – should always trigger a re-examination of your portfolio.

“Everybody, no matter how old they are, should view life events as key points in their financial life,” DeVries says. “You need to take a look at where you want to be in 15, 25 or 35 years and ask, ‘How’s our money going to work for us, and what we can expect out of it?’”

To learn more about how to respond to life events, visit firstmidwest.com/lifeevents. But if big events aren’t on the horizon, DeVries recommends staying the course. “Clients who did that during the recent economic downturn were quite happy that they did,” he says. “The markets are fairly efficient. If people believe in the efficiency of our marketplaces, they are going to be OK in the long term.”

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