2023 is almost over: Time to reassess your financial situation - opinion

A crust eaten in peace is better than a banquet partaken in anxiety. – Aesop

I know that for most of us investing and personal finance seem far from our minds currently as we are dealing with a war. Many of us know someone who has been killed, or soldiers who have been injured, or are in Gaza fighting. The level of national anxiety is high. And yet while it may seem cruel, life continues. For investors, the time is ticking as year-end approaches, and with it the need to be smart about your portfolio to make it efficient tax-wise.

This year has been good for very specific sectors of the market and been quite bad for others. As inflation surged early in the year, interest rates were raised aggressively. This has caused a very high level of volatility, especially in what would be deemed as ‘conservative’ type investments like bonds. We are closing in on a second year of big losses in what are thought of as ‘safe’ investments.

This is coming on the heels of 2022, which was a disaster for investors. There is a good chance that somewhere in your portfolio, there are losses. Whether it’s from bonds or stocks, it may be hard to believe but some good can actually come of these losses. You can be strategic and potentially save thousands and thousands of dollars. Here are some tips to make your portfolio more tax efficient as well as make sure that it still matches the goals and risk tolerance levels set forth.

Losses are not so bad

With all the market volatility you may have sold positions at a loss and now have substantial capital losses. But keep in mind that prior to last year, the market surged, and we had some years that were good for investors. Now is the time to review your portfolio to see if you have any positions that are currently at a gain. I know that many investors shudder at the thought of selling something at a loss or hate selling a favorite position that has appreciated a lot, but even if you believe that a certain stock will appreciate over the long-term, selling off the losers/gainers can actually make you money.

Market drops can be beneficial. When the position is sold, the investor realizes the loss, which has certain tax advantages. 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 huge loss in We Work stock (which declared bankruptcy) and she decides to sell it. But let’s say that she also bought shares of Nvidia years ago, and she has a big gain on the investment. She can sell part or all the Apple stock and realize the gain. Then she can use the amount of the loss and offset it against the gain in Nvidia, drastically reducing the taxes owed.

You might ask why she should sell the Nvidia stock. By selling it and using the loss from We Work to offset any capital gains tax, the investor can reset their cost basis at a much higher level, without incurring any tax liability. Meaning that you can buy back the Nvidia shares at a higher price than you had originally purchased them, thus creating tax efficiency in your portfolio. Again, I can’t stress enough the importance of speaking with your accountant before implementing these strategies. The reason is because offsetting gains and losses have different rules in different jurisdictions.

In Israel one can sell a stock and use the loss to offset gains and can repurchase the stock the next day. It’s different in the US. There is a rule in the US, 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.

Rebalance

Much has changed in the world over the last year. Investors should take the time to make sure that their portfolios are well positioned for current conditions. Rebalancing a portfolio is critical. It’s important for two main reasons. First, it keeps your portfolio in tune with your long-term goals and second, it keeps your asset allocation in line with your risk level.

Use this time of the year to sit down and reassess your financial situation. If there are changes, take the time now to re-allocate your funds to get back to the type of allocation that makes sense for you.

Speak with your accountant and financial adviser to fine-tune your portfolio before year’s end.

May all the families of the fallen be comforted. May the hostages be released. May the injured have a speedy recovery. May our dear soldiers be safe and protected.

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