Year-End Financial Checklist Tips: Consider Securities

year-end financial checklist

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In her blog, “Year-End Financial Checklist: 7 Tips to End on a High Note“, Jaclyn Jackson highlights seven important actions that will help you to get maximum value from your securities portfolio. Depending on your individual circumstances, you might be able to employ all of these excellent suggestions.

I would like to expand on a couple of the tips that Jaclyn mentions in her blog that will be applicable to everyone who invests in securities.

Harvest Your Losses

By using the technique called Tax-loss harvesting, you can generate “capital” losses that can be used to reduce your current, and possibly your future taxes. If you sell a security at a loss, you generate a capital loss, and you can then subtract up to $3,000 of capital losses from your income in each year, thereby reducing your taxes. Those capital losses can also be netted against any capital gains you would experience by selling “winners”. (Any net losses greater than $3,000 can be carried over to future years.) When employing this Tip, it is important to maintain your asset allocation, even though you have sold one of the ingredients of that allocation. You do that by using the funds from the securities sale to purchase another security that performs essentially the same job in your portfolio. You cannot purchase the same security within a 30 day period, but you can purchase one that will maintain your allocation. For example, you may sell an energy stock at a loss, due to the lowest price of crude oil in over a decade, and replace it with a different energy stock or perhaps a fund that specializes in energy. In that way, you are still maintaining the same amount of energy allocation in your portfolio.

Rebalance Your Portfolio

It is always good idea to rebalance annually to maintain the same percentage of each asset class that you started with, the percentage that represents your “ideal allocation.” (The determination of your “ideal allocation” is a subject that will be discussed in a separate blog.) Although it is important to rebalance annually, numerous studies have shown that more frequent balancing is not worth the effort. As an example, during a period when the overall market is rising, the percentage of stocks (equities) will increase compared to the percentage of bonds (fixed income) and cash. Although it may seem counter-intuitive, now is the time to sell the stocks to reduce their allocation to the “ideal allocation” percentage, and use the cash from the sale to increase the bond percentage. Why do we sell the winners? Because we know that they will not continue to win. We remain guided by our “ideal allocation”, which reflects our feelings about risk, and other elements of our financial plan that will enable us to obtain the goals we desire.

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