As we transition into a new year, these last days are an excellent time to begin preparing your investments. While it’s true you can continue making changes right into the New Year, there are a few adjustments you may want to implement before this year is over, particularly if they have the potential to improve your tax situation.
A new year presents new opportunities, so here are some of the preparations you might consider making as we move forward.
Understand the Details of Your Portfolio
Thanks to the Internet, most investors know how large their portfolio is, and at least roughly what it contains. But there are some investors who take a more casual approach to investing, and may not be entirely certain of either.
The New Year is an excellent time to study the details of your investment portfolio. This is particularly true if your money is spread across several different accounts.
You should know exactly how large your portfolio is so you can (a) track your investment goals, and (b) create cohesiveness in the investment mix.
In addition, some investors tend to accumulate assets in an almost haphazard fashion. If this is you, there should be at least one time each year when you do an in-depth review of what you’re holding, to be sure these holdings complement one another and strengthen your overall portfolio.
If you’re unsure of how to make sense of your portfolio on your own, you should consult with either a paid expert or a trusted friend who might be able to provide guidance. Alternatively, you can also sign up for an online investment advisory service, such as FutureAdvisor, that will do this for you free of charge.
Of course, you should already be doing this throughout the year. But if the year has gotten away from you, there’s no better time than right now.
Prune Losing Investments
If you have assets that have proved themselves to be losers, consider selling them before another year begins.
There are at least two reasons why you want to do this:
- To finally remove asset positions you may have been agonizing over — sometimes you just need to cut them loose and clear your head
- To free up trapped capital so you can move into new and better performing assets
Think of this pruning as the investment equivalent of doing a spring clean-up of your property. You’re clearing out useless debris, dead plants, and overgrown foliage to make room for new growth. This new growth can’t begin to come in until you clear out the old stuff.
There may also be compelling tax reasons to prune your losers. You may want to use any accumulated losses to create capital losses that will offset, or at least minimize, large gains you have with your investment winners.
This is especially important if you made a significant amount of money on any short-term trades. Since these gains will be taxable at ordinary income tax rates, rather than more favorable long-term capital gains rates, offsetting them with capital losses from your losing positions is an excellent year-end tax saving strategy.
Remember to Rebalance
Many online investment accounts have an automatic rebalancing feature. But if your portfolio is not sitting in such an account — or if it is spread among several accounts that don’t reflect the entirety of your portfolio — you’ll need to do it manually.
It’s important to re-evaluate your goals and make sure your investments are helping you reach them. If your financial goals have changed, it might be time to rebalance or sell off some of your portfolio.
Rebalancing is something you should do several times during the course of a year as it becomes necessary. But at a minimum, it should be done at least once each year. If you have not rebalanced this year, this is the perfect time. Make sure your investment mix is exactly where you want it to be as we head into the new year.
Set a New Course
The coming of the New Year is also an excellent time to set new goals, or to adjust for changes in your life circumstances that have occurred in the past year, or are expected to take place in the new year.
This could result in the need for creating a different portfolio allocation, based on a change in your risk profile resulting from the new circumstances (hint: risk isn’t strictly related to your age).
As an example, you may decide to become more aggressive in your portfolio based on some of the following life changes:
- A major promotion at your job, complete with a big salary increase
- The payoff of one or more major debts, like a mortgage, a car loan or even several credit cards
- The graduation of one or more of your kids from college
- Your non-working spouse suddenly becoming employed (additional income)
- The sale of a major asset, increasing your capital base
Turning in the opposite direction, you may decide you need to become more conservative in your investment portfolio if one or more of the following changes have taken place or are expected to soon:
- You’ve gotten married
- You’ve gotten divorced
- You’ve welcomed a child into your family
- You’re taking care of an elderly parent
- You’ve had to add significant debt
- There’s a threat of layoffs at work
The point is, there is no such thing as a set-it-and-forget-it-for-life investment portfolio. As changes occur in your life, you’ll need to adjust your investment portfolio mix accordingly.
You can get busy during the year as these events are taking place, but as you do you aren‘t adjusting your investment portfolio to the new realities.
The onset of a new year is both a reminder to make these changes, and an incentive to get your investment house in order before the New Year.