The end of a year is a time to assess what happened over the past 12 months and look forward to the promise of new opportunities. That is true with most aspects of life, and your financial portfolio should be no exception. Give your holdings a year-end review and consider these strategies as you do so.
- Reassess Your Goals – Have your investing goals shifted over the course of the year? Perhaps you have gotten married and/or started a family, switched jobs, or considered retirement. Before making any adjustments, make sure that you account for any life changes that can alter your risk or return requirements.
- Review, Replace, Rebalance – Take a look at the results of your holdings over the year with respect to the overall market. Do not just assume positive growth is a sign that your investments are doing well; the overall market could be growing at an even greater rate.
Ask your advisor to provide an alpha (the performance of your holdings compared to a risk-adjusted index), and look over poorer-performing individual holdings. Is there a reason to expect them to turn around in 2017? Can they be replaced by a similar holding at the same risk level?
If your risk/reward needs have changed or your portfolio has drifted, now is the time to rebalance your holdings to maintain your target diversification between stocks and bonds. Seek help from your financial advisor, but do not forget to do your own homework. You should be able to assess your advisor's input and performance, and whether his or her suggestions make sense in the overall market context.
- Tax-Loss Harvesting – Tax-loss harvesting is taking the underperforming stocks in your portfolio and selling some of them in order to "harvest" the losses and use them to offset capital gains for tax purposes. You can neutralize up to $3,000 in capital gains, and if you have none to offset, you can take the harvested losses as a reduction of your taxable income.
Be very careful when assessing your underperformers. Are they consistently underperforming? Is there a reason to expect them to improve? If any of those stocks should rebound, the "wash rule" prevents you from reinvesting in those or similar stocks within 30 days. Do not just jettison stocks based on a simple numerical return; consider each stock individually with respect to likely future performance.
- Dollar-Cost Averaging – If you have come out on the poor end of price volatility but want to keep investing in the same stocks, consider setting up a dollar-cost averaging approach for next year. This spreads your investments into equal purchase increments (often monthly) instead of making one large investment. This approach works well for those who prefer to "set it and forget it" and have difficulty resisting the urge to make panic moves during a sharp market drop.
- Charitable Contributions – Charitable contributions are not limited to donations of cash or goods you have about the home. You can also donate appreciated stock to a non-profit or 501(c)(3) charitable organization. Depending on the circumstances, you may be able to get a deduction based on fair market value and will not have to pay capital gains taxes on the appreciated value. The charity can choose to either sell the stock for cash or hold onto it as an investment.
During this festive season, it is easy to lose sight over mundane tasks like reviewing your investments. Resist the urge to put things off until the new year. Forgetting to review your portfolio now can cost you money later.
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