Your Investments: Year-end portfolio tips

With a week remaining in 2010, there is still time for investors to make some adjustments that can create tax savings.

By AARON KATSMAN
With a week remaining in 2010, there is still time for investors to make some adjustments that can create tax savings and get their portfolios ready for the upcoming year. This year has been a solid one for global financial markets, and many investors have realized nice profits on certain positions in their portfolio.
Here are some tips to make a portfolio that has appreciated in value more tax efficient and to make sure it still matches your goals and risk-tolerance levels:
Profit from losses
If you have sold positions and now sit with capital gains, review your portfolio to see if you have any positions that are currently at a loss. While many investors would never consider selling a position that is losing money, selling your losers can actually make you money.
Never think all is lost; some good can be derived from losing stock positions. When the position is sold, an investor realizes the loss, which has certain tax advantages. The loss can be used to offset other gains, thus lowering the tax bill. In fact, for many investors, tax-loss selling may be the most important way to reduce your tax bill. If done correctly (be sure to speak to your accountant before making any trades), it can save you money.
For example, if a person has a gain in Stock A and he decides to sell it, he will be taxed on that gain in full. But if he has a loss in Stock B that he actualizes by selling, he can use the amount of the loss and offset it against the gain in A, drastically reducing the taxes he owes. This might not recover the entire loss, but it certainly cushions the blow.
Conversely, if you have substantial losses from previous years, you should speak to your accountant at once to see if it pays to sell positions that have gained in value, allowing you to cushion any future tax bill. By doing this, you can reset your cost basis at a much higher level, without incurring any tax liability. You have until the end of the year to implement these strategies.
Be careful
In the United States there is the so-called Wash-Sale Rule, whereby the IRS disallows a loss deduction from the sale of a security if a “substantially identical security” was purchased within 30 days before or after the sale. Let’s say you sold 100 shares of Microsoft on December 23 at a loss and buy back those 100 shares of Microsoft on January 15, 2011; the loss deduction would not be allowed .The Wash-Sale Rule is designed to prevent investors from making trades for the sole purpose of avoiding taxes.
Get current
Much has changed in the world over the last year. You should take the time to make sure that your portfolio is well-positioned for current conditions.
One of the most overlooked aspects in longterm investing is the need to rebalance a portfolio.
Rebalancing is important for two main reasons: It keeps your portfolio in tune with your long-term goals; it keeps your asset allocation in line with your risk level.
For example, let’s say that two years ago you started with an allocation of 60 percent stocks and 40% bonds in a $100,000 portfolio. Over the last two years the stock market has appreciated considerably.
Assuming all gains and dividends are reinvested and no money was deposited or withdrawn, the stock portion of the portfolio would be worth a lot more than the initial $60,000, while the bond holdings would be worth a bit more than the $40,000 invested.
As you can see, changes in the market can impact the makeup of a portfolio. Here, instead of being a 60% stocks and 40% bonds, the portfolio has an allocation of 70% stocks and 30% bonds.
That can result in a portfolio that is completely different than what you want and unaligned with your risk profile.
Speak with your accountant and financial adviser to fine-tune your portfolio before year’s end.
aaron@lighthousecapital.co.il
Aaron Katsman, a licensed financial adviser in Israel and the United States, helps people with US investment accounts.