Your Investments: End of year strategy for large market gains

“A politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn’t happen.” – Winston Churchill

After a year of stellar stock market gains, many clients are a bit nervous about what the future has in store for their investments. I’ve been getting calls from clients asking if maybe they should sell and book some profits. When we discuss the pros and cons of such a decision, the moment I mention that there could be capital gains tax to pay, I usually get a “Forget it; I don’t want to have to pay tax.”

While I fully agree with that sentiment, sometimes the fact that you need to pay a bit of capital gains tax is a good sign that you made money. I am usually a big advocate for holding good investments for the long term, but in certain instances, it does make sense to sell and bank your profit.

Just because it’s been a good financial year doesn’t mean that investors should become complacent. The end of the year is always a good time to review finances, compare your current situation to your stated goals and needs, and check how you are progressing toward achieving your goals.

Now is the time for some strategic planning. Smart planning can literally save you thousands and thousands of dollars. With Hanukkah approaching, that’s some serious gelt (money)!

Losses can be profitable

With markets up so much this year there, maybe you actually bit the bullet and decided to sell at a profit and now have substantial capital gains. Don’t assume that will guarantee you a hefty capital gains tax bill.

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 Nvidia stock, and she decides to sell it. She will be taxed on that gain in full. But if she holds a company like Intel, 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 Nvidia, 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, you can sell a stock, use the loss to offset gains, and repurchase the stock the next day. However, it’s different in the US. There is a rule there 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 of long-term investing is the need to rebalance a portfolio. Rebalancing is important for two main reasons. First of all, 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% in 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 sit down and re-assess your financial situation. If there are changes, take the time now to reallocate 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 the 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 the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing. www.gpsinvestor.com; aaron@lighthousecapital.co.il