Yahoo Finance Boost Your Portfolio Before the New Year
The time to review your stock and bond portfolio isn't in the New Year, it's now.
Here's a look at some tweaks you can make before Dec. 31 to help optimize your investments and save money on your tax bill.
The end of the year is "a great excuse to make sure that investors are revisiting their portfolios," says Chris Morahan, institutional portfolio manager with Eaton Vance Management.
Now is the time to check for any positions that may have lost value, sell them and use the losses to offset winning investments that would trigger capital gains taxes, says Bob Phillips, managing principal with Spectrum Management Group. The amount of savings will depend on the amount of loss and the investor's tax bracket, he says.
[See: 7 of the Best Stocks to Buy for 2017.]
Investors also should check capital gain distribution estimates for their traditional mutual funds. Phillips says that's because the funds might sell out of a position that has appreciated in value over a time frame longer than the investor has owned the fund. That could require a relatively new investor in the fund to pay capital gains even if the fund lost value overall.
He also recommends checking CapGainsValet.com to see about planned distributions and then selling a fund if it would expose the investor to outsized capital gains taxes.
It would also be prudent to take more deductions this year and push more income in 2017 -- possibly by deferring a bonus if your employer will let you -- because of the possibility that the new administration and Congress could reduce income tax rates next year, Phillips says.
For people who make charitable deductions, it may be smart to prepay some of next year's contributions this year to boost deductions, he says.
Morahan recommends investors make sure their portfolios are sufficiently diversified.
Because U.S. stocks have performed well compared to other parts of the world in recent years, investors are vulnerable to "recency bias" and may think they should only put money in the domestic market, he says.
But he recommends not neglecting international holdings as there are good valuations in stocks abroad.
Adam Watts, managing partner with EAM Partners, says now is a good time to make sure your portfolio is structured to weather different market conditions over the long run.
A balanced portfolio will not only be able to handle a normal business cycle, but also environments of rising inflation, deflation and crises.
[See: 7 of the Best ETFs to Own in 2017.]
Bonds will tend to do well in the first part of a normal business cycle as interest rates decline while stocks will tend to do well during the second part of a normal cycle when interest rates are on the rise, Watts says. Bonds tend to do well in a deflationary environment while stocks do well during parts of an inflationary environment, but a crisis can harm them both, he says.
Portfolios designed based on what's happened over the last five years will be heavily weighted toward stocks and bonds, but Watts says times are changing. Short-term term interest rates have been rising, and market participants are widely expecting a Federal Reserve interest rate hike. Rising interest rates have boosted the U.S. dollar, affecting global markets.
Bonds aren't likely to perform as well over the next five years, Watts says. Anticipation of an interest rate increase has helped pressure bonds.
But if there is one thing to be learned from the election, it's that forecasts have limited value, he says. He recommends investors expecting more of the status quo reevaluate their portfolios.
"You should be designing your portfolio to be forecast-free," he says.
One way to protect a portfolio is to have exposure to managed futures funds that can go long or short in a diversified basket of stocks, bonds commodities and currencies, Watts says.
These funds can go short during a crisis, and their commodities components tend to do well in inflationary environments, he says. They do well during the beginning of deflationary environments when prices are falling in a sustained manner before hitting a floor, and they perform reasonably well in a regular business cycle, he says.
But because these funds are trend followers, Watts says they don't do well in low-growth environments like what the market has seen in recent years. Their Achilles' heel is when there aren't sustained price movements either way.
For investors who have been shying away from Treasury inflation-protected securities, now is also the time to re-evaluate that strategy given increased consumer price index readings and the potential for inflationary pressures from lower taxes, increased government spending and possible protectionist policies under the new president and Congress.
[Read: How to Invest in Bonds as Interest Rates Rise.]
"The secular trend is likely more toward higher inflation," Watts says.
More From US News & World Report
