The holiday season has only just officially begun, but even as you peruse the Black Friday sales and plan what to do with your Thanksgiving leftovers, it’s not too early to ponder what to do with your portfolio to get ready for the new year.
These following are some steps you should consider as you look to 2014. Take action before the end of the year and you may well be grateful as you sit down to draft next year’s Thanksgiving list.
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1. Rebalance your portfolio. The stock market’s gains, on track to make 2013 the best year for equity investors since 1997, have left many portfolios seriously askew. If you set up an asset allocation, it was for a very good reason: Those target allocations are in line with your long-term goals, and you shouldn’t allow any kind of one-year return, however spectacular, to distract you from those expectations.
That’s especially true when the part of the market that you’re likely to be overweight (stocks) is in overvalued territory and the other major asset class (bonds) may well underperform in the near term, as the Federal Reserve’s policymakers pull back on their bond purchases. Whenever you allow your asset allocation to get out of whack, you’re letting the amount of risk you’re taking rise.
2. Think about your taxes. Like investment fees, taxes can mean that you’ll end up capturing only part of the annual returns that newspaper headlines will be trumpeting. And rebalancing, if it isn’t done carefully, could leave you with a hefty tax bill that will do a different kind of damage to your savings plans. So in making any necessary adjustments, take full advantage of the shelter provided by your 401(k) or other tax-sheltered retirement vehicles, where you won’t be subject to taxes. And make sure to use all of your past capital losses to reduce any obligations.
This is also a great opportunity to make sure that your portfolio is structured in the most tax-efficient way possible. It may be worth investing a few hundred dollars and a few hours talking though some of the potential traps that lie ahead with a financial planner. That could help you avoid a few thousand dollars of additional tax liabilities down the road.
3. Prepare for a rising dollar. There are no guarantees in life or in investing, but one near-certainty is that at some point in 2014, we’ll see Janet Yellen’s Fed finally begin to “taper,” cutting back on the $85 billion in monthly bond purchases. When that happens, interest rates will rise and, eventually, so too will the U.S. dollar. The greenback might take some time to follow suit, but it will happen in this cycle just as it has happened before. That has implications for what you’ll earn on your overseas investments, and could take a toll on corporate profits later in 2014 and into 2015, since about two-thirds of U.S. corporate profits are generated overseas.
4. Double-check key documents. Make sure your will, life insurance, health care proxy and all other important paperwork are up to date. Remember that big life changes can happen without any notice, giving you little or no time to make those last-minute changes you’ve been procrastinating about for too long. By the time you’re in a position to realize just how significant and unpleasant the consequences of failing to update all this paperwork can be, it might be too late. So do it now.
5. Discuss any outstanding financial issues facing your family. Perhaps you want to give your children an introduction to philanthropic giving, or introduce them to the idea of budgeting and investing. Maybe it’s time to talk to your high-schooler about what you will and won’t be able to do for him or her financially, the need to save for college expenses, or the idea of working over the summers. Or maybe you want to find a way to open a conversation about how you’ve planned to distribute your estate.
Of course, all of these are sensitive topics, and if you’ve already got a fraught family reunion looming on the horizon, it’s probably a bad idea to make it more stressful still by bringing up contentious topics like family finances. But if your family is generally closely-knit, you can take advantage of everyone being gathered together to raise issues in a low-key way that might not be possible if you convened a special meeting for that purpose.
You may have noticed a theme running through these suggestions: In the heat of the moment, responding to the latest piece of market news, it’s tough to step back and think about our long-term plans and objectives. Yet the less time we spend making sure our short-term actions and reactions are in line with those longer-term goals, the less likely we are to end up where we want to be.
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