Second-Half Checkup: A Five-Step Program

Here are some basic moves every investor should take at the six-month mark.
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I love the summer. The beach, the sun, the early afternoon frozen drinks.

Compared with those options, it's no surprise the last thing you want to be thinking about is your current financial situation.

But you're halfway through 2005 and if you have upcoming expenses or a holding that has thrown off your asset allocation, you may need to do some reconfiguring.

There's certainly no need to get off the beach at this point. Just print out this list, grab your recent brokerage statements and a recent pay stub, and dig your toes deeper into the sand as you heed the following suggestions.

Check Your Allocation

Making sure your mix of stocks, bonds, cash and other assets (like real estate) remains on target is the most important midyear task.

"If it's off by more than five to 10 percent, don't wait for year-end to rebalance," says Rande Spiegelman, vice president of financial planning at the Schwab Center for Investment Research. Do it now.

So if your shares of

Google

(GOOG) - Get Report

or

Genentech

(DNA)

have taken over your portfolio since you bought them, it's probably time to sell some of that position. Granted, selling a winner is the hardest part of investing but, hopefully, you established a breakpoint when you bought the stock. Now you need to adhere to it.

Don't be greedy. If you traded through the 1990s, you know what can happen.

If you haven't reevaluated your interest-rate exposure recently, do that too. Remember, with all this interest rate uncertainty, you need to be in financial vehicles that will grow if and when interest rates go up. So make sure your fixed income is weighted in shorter maturities. And shop around for a more competitive rate on your savings accounts. With short-term CD rates around 3%, they might be worth considering.

Finally, review your portfolio's overall international exposure. Even though nothing has really changed since the beginning of the year -- oil prices still are up and terrorism obviously is not going away -- you need to keep your eye on theworld. "It's a small planet so pay attention to the deterioration of international trade policy and currency valuation," suggests David Diesslin, CFP and CEO of Diesslin & Associates in Fort Worth, Texas. These unknowns could have a serious effect on your holdings, so stay tuned.

Make Some Tax Adjustments

Beyond reviewing investments, run a tax projection based on your year-to-date numbers. That basically means dropping your info into TurboTax and attempting to generate a mock-2005 tax return. That will give you afeel for your current tax position and how it will affect your tax bill next April.

If your tax bill is not what you expected, consider adjusting your withholdings or changing your quarterly estimated income tax payments if you're self-employed, says Bill Fleming, directorof personal financial services at PricewaterhouseCoopers in Hartford, Conn.

If you think you're going to get a big refund, then maybe you're having too much withheld. And

remember, from an economic perspective, you don't want to give Uncle Sam your money.

If you think you're going to owe more than you anticipated, ask your HR department to withhold more from your paycheck (or make a bigger quarterly payment).

You may need to fill out another

Form W-4 -- Employee's Withholding Allowance Certificate

to have the amount withheld changed. Check out the Web for

W-4 calculators for guidance on how much should be withheld. You just drop in a few numbers regarding your tax situation and it will help you determine how much should be withheld.

In addition, scan your portfolio for those few holdings that may have generated some losses; then consider dumping them. Unless you have a strong belief the stock is going to rebound between now and year-end, generating losses will help your tax situation next April. Remember, your losses can offset gains and thereby wipe out your tax bill.

Granted, most people wait until year-end to do so-called tax-loss selling, but consider doing it now while you have more leisure time and aren't stressed out because of the ever-painful holiday crowds and shopping. At that time of year, "there's less time to make a thoughtful decision" says Spiegelman.

Plan for Future Spending

If you're going to need money in the next year or two for, say, your child's wedding or college tuition, start moving that money into money market accounts. There is no reason to risk it in the stock market since your crystal ball will not help you these days.

"It's really important to make sure you're on track for your spending goals," says Dave Moran, a CFP and senior vice president at Evensky & Katz in Coral Gables, Fla.

And if you're retired, it's even more important to understand your spending habits. "What's the next two years of living expenses look like? And are you on track?" asks Moran. Determine whether you can generate more income or you'll need to cut back on your spending.

Consider Retirement

Are you maxing out your 401(k)? You'd better be. If you're not, then start. At least make sure you're contributing up to your employer's match. That match is free money, so you'd better not be leaving it on the table.

If you're 50 or older, make sure you're taking advantage of the available catch-up provision. That means you get to put in an extra $4,000 a year to bring your annual total to $18,000.

Self-employed folks, whether it's an IRA or a solo 401(k), the same rules apply to you. Make sure you're maxing out your contributions. And if you don't have a retirement plan in place, get one. There are a bunch of options out there these days (good fodder for another day), so do somelegwork and pick the plan that's best for you.

Take Care of You and Your Heirs

Do you have a living will in place? Living wills, a.k.a. health care directives, are for everyone, not just the elderly. The Terry Schiavo fiasco should've proved that.

A living will allows you to write down your wishes about your end-of-life medical care. Do you want the feeding tube or not? Having your wishes in writing not only allows you to live your life your own way, but it will help your family if they ever need to make those tough decisions. If youdon't have a living will, get one.

And finally, evaluate your gifting program for 2005. "Avoid the year-end rush to make deductible contributions and/or take advantage of the annual $11,000 gift tax exclusion," Spiegelman says. "Give yourself plenty of time to be thoughtful about giving to family members and charitableorganizations."

So while you're soaking in the sun, take a few minutes to think about your current financial situation. Spending a little time on it now will inevitably allow you more beach time in the long run.