Monitoring the performance and components of your investment portfolio should be part of your normal financial activities. While it is usually not advisable to make substantial changes on a frequent basis, spending some time looking at it closely every three or six months is probably a good idea. This is especially important in light of recent events.

In the summer of 2003, a new tax law was enacted that results in significant changes in the way investment returns are being taxed. Since then stock market moved up substantially in 2003 and has been somewhat volatile in 2004. And there have been many revelations about activities of several mutual funds that are giving many investors pause.

The 2003 Tax Act
This tax bill was "good news" for most individuals and especially for stock market investors. The marginal rates on all income were reduced through the expansion of lower rate brackets and the acceleration of rate reductions scheduled for later years.

The tax rate on long-term capital gains (investments held for more than a year) has been reduced to a maximum of 15%. This applies to gains realized after 5/5/03 and is scheduled to be in effect for all tax years through 2008. The rate on gains for taxpayers in the 10% and 15% brackets will be 5%.

The 2003 Tax Act also reduced the maximum rate on qualifying dividends to 15% just like the tax rate on long-term capital gains. This tax rate for dividends applies to most dividends from investments, but does not cover receipts that are "interest" in nature like those from money market funds and fixed income mutual funds. It also does not apply to distributions from real estate investment trusts.

Recent Stock Market Activity
Overall, the stock market went up during 2003. From market lows in the spring, the Dow Jones Industrial Average, the NASDAQ and the S&P 500 indices have risen. While certainly not every stock has risen, many have. In fact, from the beginning of 2003 to the end of December, the Dow Jones Industrial Average rose about 25% and the NASDAQ even more.

2004 has been a more difficult year for the stock market. The political uncertainty, the war in Iraq, the price of oil and the economy have all contributed to a period of greater volatility. The market actions of the last couple of years point out the need to take a long term view with your investments.

As an investor, it is important to evaluate how the changes in the market have affected you asset allocation (how your investments are allocated to stocks, fixed income investments and cash investments). This important decision should be based on your time horizons and your risk tolerance. Generally, the longer your time horizon and the greater your risk tolerance, the more you should consider having more of your investments in equity investments. Over time, they have produced higher returns, but with higher risks and greater fluctuations.

You should examine how the changes in the market have changed your actual asset allocation. You will probably find that the portion of your portfolio in stocks has risen on a percentage basis since the beginning of the year. If it is still within your overall asset allocation guidelines, that is fine. However, if you find "too large" of an allocation in stocks, consider making a change. You may also want to use this "asset allocation" review as a time to evaluate your individual holdings as well. Many commentators believe that the old "buy and hold" strategy is not as wise as it seemed a few years ago.

Mutual Fund Revelations
The allegations of improper (or in some cases, potentially illegal) activities at some mutual fund organizations are certainly troubling. Estimates are that over 95 million individuals have invested $7 trillion in funds. Hopefully, greater scrutiny by the various regulatory bodies and the publicity surrounding mutual funds will result in positive changes to help restore confidence in this convenient and attractive way to invest.

As individual mutual funds deal with these issues, you may want to discuss your holdings with your investment advisor or seek information from the funds themselves.

Caveats
Everyone's individual income tax and investment situations are different. The complexity of the income tax rules can make the choice of seeking professional advice very worthwhile, especially if your tax situation is complicated or if you are not comfortable dealing with it by yourself. The same can hold true for your investments. If you want or need counseling, do your homework and find an advisor that is knowledgeable and that will put your interests first.