How to Get Your Portfolio Ready for the New Year

It’s that time of the year where things start to slow down, and we prepare for the next new year.

Currently, Christmas is a little less than a week away, we are a few days into Hannukah, and the New Year is right around the corner.

This is a time of rest and relaxation with friends and family and those most important to us.

Also, right around the corner is the new year and preparing your portfolio for 2023.

This Year is A Little Different

This year, to put it lightly, has been a challenge for investors.

High inflation, a hawkish Fed, and overall uncertainty about the market has led many of the major indexes to double digit losses in years.

It is easy to ignore those statements that you are getting from your brokerage firms and advisors and think “I’ll just worry about it next year.”

While I cannot blame you that is not the right outlook.

There is an opportunity this year to rebalance your portfolio and buy securities at a cheaper price than we have been able to in years.

You can also use the tax law to your favor this year and realize capital losses and lower your tax bill.

This post will layout many of the steps you should be taking to kick off 2023 in regard to your portfolio. Here are those steps.

Rebalancing Your Portfolio

At least once a year you or your advisor should rebalance your portfolio.

As investments gain or lose value over the course of the year their allocation within your portfolio changes.

Let’s take for example someone who invest in a 60% stock 40% bond portfolio.

Let’s say that the stock market has grown by 20% in year 1 and the bond market by 5%. Their portfolio would have grown to approximately $114k and stocks now make up 63% of the portfolio.

Let’s assume that happens the next two years as well. Not stocks make up 70% of their portfolio.

Finally, the market pulls back, and the stock market is down 30% and the bond market is flat. Because this investor has a heavier allocation to stock, they will likely lose more money.

It is important to rebalance your portfolio in accordance with your risk tolerance. If you don’t you run the risk of becoming more aggressive over time and experiencing larger losses.

Tax Loss Harvest

Tax loss harvesting is an opportunity to remain invested but lock in losses for the current tax year.

Let’s say you own a large cap mutual fund that is down 10% from when you bought it. You could sell that mutual fund, realize the loss, and turn around and buy an ETF like the S&P 500 ETF and not miss a beat.

Chances are that ETF is very similar to the mutual fund you held but different enough to avoid a was sale (read here to learn more about wash sales).

This leaves your money invested but allows you to offset any gains in other parts of your portfolio you may have realized and write down your income on your taxes by $3k.

If you realize a loss large enough, you can carry it forward each year to offset future gain plus an additional $3k each year.

This is sometimes referred to as a “tax war chest” because you realize these losses while still staying invested and can more efficiently manage future taxable gains.

Reassess Your Risk

This is also the prime time to reassess your risk tolerance.

Perhaps you were more conservative going into this year because you felt the market was going to pull back.

Not might be the perfect time to become more aggressive in order to capitalize on the lower prices.

Or maybe this market scared you so much that you realize you were too aggressive. Now you have a better gauge of your risk tolerance moving forward and will be more conservative.

There is no right answer for all investors but times that test your mettle, like we are currently going through, help you narrow down if you are taking on too much risk.

What’s Your Goal

Finally, this is a great time to see how close you are to your financial goals.

Understanding how close you are not can help you determine things like how much you should save and how aggressively the money should be invested.

The new year is a natural checkpoint to reflect, and update moving forward and pursue your goals.

It is also a good time to add more goals to your financial plan. Things like buying a new house or saving for a child’s education may be more important now.

Working with you advisor to understand the whole picture will allow you to level set your goals next year.

New Year Same Process

The overarching theme here is that there are certain steps you can take to make next year more successful than the last.

But at the end of the day the process remains the same. Make decisions based on your financial plan and how aggressively you want to invest your money.

Stick with it through thick and thin. Make small changes to optimize instead of completely revamping your portfolio.

Along the way take advantage of tax loopholes to ensure you are getting the most bang for your buck in down markets.

And most importantly stick to you plan and do not panic!

What are your financial goals for 2023?