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Tags: financial | year end | tax losses | portfolio

2 Financial Tasks You Must Do by Year's End

2 Financial Tasks You Must Do by Year's End

By    |   Thursday, 22 December 2016 10:24 PM EST

With the holiday season upon us, it’s hard to focus on things like work and your finances. I get it. But there are two quick things you can do end the year in the best financial condition possible.

First, the clock has almost run out on the opportunity to take advantage of Uncle Sam’s policy regarding investment losses. You’re allowed to write $3,000 per year off your taxes if you buy a stock and sell for a loss.

If you’ve been following any of my investment recommendations, that’s a tall order. 2016 has been a great year, with lots of gains and nearly no booked losses except for a few small hedge trades. Even better, the overall stock market itself looks set to close up around 10-12 percent. That’s an above-average gain historically, and nearly all of it has occurred in the past few weeks.

But that’s OK. Chances are somewhere in your portfolio there’s a position that’s declined as the market has rallied. Or you may have a position from a previous year that is still showing at a loss. Why not take that loss now to offset your gains? That will allow you to reduce your income for tax purposes, a savings of anywhere from 25-40 percent depending on your bracket and state tax levels.

If you still like the stock, simply buy it back after 31 days. Chances are the price might change a little bit, but not a lot, as the holiday season unfolds. The best part with this strategy—known as “tax loss harvesting”—is that by taking the tax loss, you can re-enter a position at a lower cost basis and be set up for future gains.

If you have more than $3,000 in losses, you can use a tax loss carryforward to take full advantage of the law as well. Under this policy, you might close out a position with $6,000 in losses, take the maximum $3,000 this year, and then the second $3,000 next year. Yes, the government lets you do that. It can be a huge benefit in years where the market takes a steep dive, or if you have a position that ends up blowing up on you. But for a year like 2016, where most assets generally did well, it might not be as useful.

The second and possibly most important thing you can do between now and the end of the year is rebalance your portfolio. Rebalancing is the process of figuring out where your portfolio stands today, and how that differs from where you would like to be. If you bought a sector that’s done twice as well as the rest of your portfolio, it means selling off some of that and re-deploying that cash into the positions that haven’t done as well. It keeps things in balance over time.

I’d rather you do it now, get it over with, and not wait until January. Why? Because if you wait until January, it’ll seem tempting to put it off until February. Eventually, it might not get one at all, or it might get done at an inopportune time.

Rebalancing your portfolio now may mean taking some more profits, but if you’ve followed the first step and maximized your losses, you’ll be in good shape.

In theory, a retirement plan like a 401(k) should have a rebalancing option that allows you to automatically sell what’s done well and buy more of what haven’t on an annual, semi-annual, or quarterly basis. If you can automatically do that in a system like that, definitely do so. In accounts where you can buy individual stocks, however, it can be a bit trickier.

The best part about rebalancing is that you’re putting yourself in a position where you’re taking some profits now, and putting cash to work in what hasn’t. That should lower your cost basis in what hasn’t been doing well. Since investing can be cyclical, it’s often true that last year’s losers are this year’s winners. Rebalancing is a way to help prevent one position from dominating your portfolio, but it’s also a way to ensure the highest likelihood of getting consistent profits year over year.

Finally, everyone is different. It might be beneficial to talk to your financial team in the next few weeks—even after the holidays is fine if you put it on the calendar now. That includes any stockbrokers you might have, your accountant for getting the best tax advice that applies specifically to you and your situation, and even your attorney to ensure that things like your estate plan are still in order after everything’s changed.

I know these things seem to detract from the spirit of the holiday season—but they really don’t. Maximizing your returns for the long-term by rebalancing and minimizing taxes where possible help you keep more of what’s yours.

Bottom line: I want you to benefit from all these factors, not just the investment advice that you get here throughout the year. While I’m grateful for the opportunity to serve you, I know I can only adequately cover one part of your financial needs. I know it’s been a crazy year overall, both in and out of the markets. Thanks for sticking through it with me.

Have a safe and wonderful holiday season!

Andrew Packer is a Senior Financial Editor with Newsmax Media. He currently writes the Insider Hotline investment advisory, serves as investment director for the Financial Braintrust, and is managing editor of Financial Intelligence Report.

© 2022 Newsmax Finance. All rights reserved.

With the holiday season upon us, it's hard to focus on things like work and your finances. I get it. But there are two quick things you can do end the year in the best financial condition possible.
financial, year end, tax losses, portfolio
Thursday, 22 December 2016 10:24 PM
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