Your Investments: Great year in markets: Be strategic end of year

Investors tend to have very short memories.

Calculating taxes (photo credit: INGIMAGE)
Calculating taxes
(photo credit: INGIMAGE)
I think you just prepare the way you’ve always prepared and go about the game the same way and see where you stand at the end of the year. Christian Yelich
Investors tend to have very short memories. Last year at this time we were in the midst of a fast and furious market rout that over the course of 7-8 weeks ended in a 20% drop. I was reviewing the portfolio of a client who has a very long-term time horizon and he told me that he was nervous over the market spike this year. I asked him if he remembered what happened last December, and he said that he had no idea what I was talking about. I reminded him about the market drop and he said he forgotten all about it. I told him that just he like he forgot about the most recent market debacle, he will also forget about the next time it happens. Why? Because over the long-term, historically, markets go up. Just ask anyone who lost 30-40% of their portfolio in 2008. In the investing business, time is your friend. The markets not only made up the crash of a decade ago but have gone well above and beyond where they were previous to the subprime crisis.
That being said, investors shouldn’t become complacent, 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. With Hanukkah approaching, that’s some serious gelt!
Losses can be profitable
With markets up so much this 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 Microsoft stock and she decides to sell it. She will be taxed on that gain in full. But if she holds a company like Kraft-Heinz, 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 Microsoft, drastically reducing the taxes owed.
Again I can’t stress enough the importance of speaking with your accountant before implementing these strategies.
Beware of wash-sale
In Israel one who sells a stock and uses the loss to offset gains 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.
Get your allocation right
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 reasons. First, 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. Use this time of the year to re-assess your financial situation. If there are changes, take the time now to re-allocate 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 the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing (McGraw-Hill), and is a licensed financial professional both in the United States and Israel, and helps people who open investment accounts in the United States. Securities are offered through Portfolio Resources Group, Inc. ( Member FINRA, SIPC, MSRB, FSI.
For more information, call (02) 624-0995 visit or email [email protected]