Three portfolio moves to consider by year-end
This year has proven to be a much better year for investors than 2022, which saw the worst bear market since the global financial crisis of 2007-2008.
As of December 13, the S&P 500 was up about 21%, and the Nasdaq Composite Index was up about 39%. Technology stocks have rebounded significantly after a brutal 2022, and improving inflation has brought hope that the rate hike cycle may be coming to an end. Maybe it even sparked a Santa Claus rally.
With just a few weeks left in the year, now is a good time to take a look at your portfolio, given the incredible volatility we’ve experienced over the past two years. Here are three recommendations to prepare for 2024:
1. Reevaluate and reallocate
This time last year, the smart move would have been to look for good buys, especially among tech stocks that have been on the decline and suffered big losses in 2022 and have plummeted in value. If you took advantage of these great deals, you could have gotten cheap shares of Apple (NASDAQ:AAPL), which is up 50% this year, or Amazon (NASDAQ:AMZN), which is up 75%.
Considering that most analysts expect below-average returns and a slowing economy, it’s likely that some of the most overvalued high-net-worth investors will come back to reality.
As an investor, you should take the time to check valuation metrics, especially for top performing companies, to see if they are outside of normal ranges. If so, it could be an opportunity to dial back and reallocate partial positions to stocks that are better valued, are in more stable or recession-resistant industries, or have more growth potential. Since bond yields are falling and returns should be safe and solid compared to many stocks, you may also want to consider increasing your allocation to bond investments.
Part of the process also requires reassessing your risk tolerance. As you get a year older, your tolerance for risk may not be the same as it was a few years ago. So when it comes to stocks, you may want more fixed income than before, or you may want less aggressive growth that favors value.
2. Make sure you’re on track toward your long-term goals.
Most people typically invest for larger goals like retirement, but they also have other financial goals along the way, like college tuition. If you don’t have a plan for how much you need to retire through a 401(k) or other retirement account, it’s a good idea to create one. There are some very basic rules of thumb for calculating how much you need. For example, one of the tools provided by Fidelity Investments provides some signposts along the way.
Fidelity suggests you should save 1x your salary for retirement by age 30, 3x by age 40, 6x by age 50, 8x by age 60, and 10x by age 65. So if you’re 45 and you make $60,000 a year, you’d need to save about 4.5 times that amount, or $270,000. If you earn $80,000 per year by age 65, you’ll need about $800,000 to retire.
Using this general rule or something similar will help you know where you stand. If you fall short of these criteria, you may need to set aside more money for retirement, which may include budgeting your expenses to allow for more investments. You may also need to change your investment strategy if it has greater long-term growth potential. The same goes for other goals, like college.
The end of the year is a great time to take stock of where you are in achieving your financial goals and make changes if necessary.
3. Recoup your tax losses
As the calendar year ends, so does the tax year, so any moves made before December 31 will be reflected in your 2023 taxes. When it comes to investments, you should look into whether you can get a tax benefit from your losses.
If you have stocks or investments that are underperforming and appear to have a bleak future, it may be a good idea to sell them before the end of the year to recoup those losses and receive a tax benefit.
Here’s an example: If you sell long-term stocks or funds for a capital gain of $20,000, 20% of that, or $2,000, may be taxable, depending on your tax bracket for capital gains. However, a variety of factors may place you in either the 0% or 15% tax bracket for capital gains, so it’s a good idea to know which bracket you fall in if you’re not sure.
Going back to the $20,000 capital gain, if you sold the asset at a loss of $15,000, that amount would be deductible from your profit and your tax liability on the capital gain would be lower. You can then reinvest in new stocks and assets with greater long-term growth potential. However, this strategy only makes sense if you feel that your investments have gone as desired and that the upside is limited.
These three year-end moves and others should be discussed with your financial advisor, if you have one.
