Roller coaster year in markets: End of year tips - opinion

Speak with your accountant and financial adviser in order to fine-tune your portfolio before year’s end.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
 “Many liberals argue that big US companies don’t really pay the top corporate rate. While this is sometimes true, it’s mainly because, during recessions, companies lose money and get a tax loss carryforward that temporarily reduces their effective rate. But during economic expansions, when profits rise, companies then do pay the top rate.” – Lawrence Kudlow
Hanukkah is over and now it’s back to reality. It’s time to come down from the sufgania sugar high. I know someone, on a diet, who really likes the tasty highly caloric donuts, and he committed to cut back other foods in order to eat Sufganiyot and stay within his daily calorie limit. Probably not the wisest thing to do regarding health, but his feeling was that “you still gotta live and enjoy life!” Well thankfully it’s back to reality and all that entails. We are also now within the last two weeks of 2020, and there is no better time than the end of the year to do some strategic planning. Some smart planning can literally save you thousands and thousands of dollars.
Losses can be profitable
This has been an unusual year for stock markets. Markets started the year moving higher, dropped by more than 30% in five weeks, and have climbed all the way back and then some over the second half of the year. With all the volatility and with markets higher for the year, there is a good chance that you may have sold positions at a profit and now have substantial capital gains. If so, review your portfolio to see if you have any positions that are currently at a loss. I know that many investors shudder at the thought of selling something at a loss, but even if you believe that a certain stock will appreciate over the long-term, selling off the losers can actually make you money. Some good can actually be derived from losing stock positions. 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 their tax bill. If done correctly (be sure to speak to your accountant before making any trades), it can save a tremendous amount of money. Let’s use a real life example. A woman has a gain in high-flying Tesla stock and she decides to sell it, she will be taxed on that gain in full. But if she holds a company like Exxon Mobil, which has been shellacked this year, and is sitting on a huge loss that she actualizes by selling, she can use the amount of the loss and offset it against the gain in Tesla, drastically reducing the taxes owed.
Again I can’t stress enough the importance of speaking with your accountant before implementing these strategies.
Be careful of the wash sale
In Israel, one can sell a stock and use the loss to offset gains and is able to repurchase the stock the next day. It’s different in the US. There is a rule in the US, called the wash sale rule, where 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. The wash-sale rule is designed to prevent investors from making trades for the sole purpose of avoiding taxes.
It’s all about your allocation
With the run-up in global financial markets investors should make sure that their portfolios are up to date. One of the most overlooked aspects in long-term investing is the need to rebalance a portfolio. Rebalancing is important for two main reasons. First of all, it keeps your portfolio in tune with your long-term goals and second, it keeps your asset allocation in line with your risk level.
Let’s say that you began the year with an allocation of 70% stocks and 30% in bonds. Just from the stock market jump this year your asset allocation may now be 80% in stock, meaning that your portfolio is more aggressive than you want. Try to use this time of year to sit down and reassess your financial situation. If there are changes, take the time now to reallocate your funds to get back to the type of allocation that makes sense for you.
Speak with your accountant and financial adviser in order to fine-tune your portfolio before year’s end.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
Aaron Katsman is author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill). or email