The holidays are often a time where we reflect upon our lives, give thanks for what we have, and look to give back to those in need. This time provides us the opportunity to evaluate the year and make our resolutions for the next. And ideally, your investments should fall somewhere in this process of reflection. After all, your portfolio, if planned well, can be a gift that has the potential to keep on giving, to you and the ones you love for many years to come. To help get you started this year, here are a few year-end investment tips that are always important to remember.
Evaluate your goals. What are the goals for your financial assets? Are they all achievable? Have they changed since last year? Sometimes these questions are the most difficult to answer, yet they are the most important. Alongside your time horizon, cash flow needs and tolerance for risk, these questions are the basis for your financial plan. And if you don’t have any investment goals or a financial plan, now is an excellent time to create one. Having a plan in place that is properly aligned with your goals gives you the best chances to succeed.
Review your diversification and harvest losses carefully. With the recent volatility in the markets, you’re probably looking to sell some underperformers in your portfolio and harvest some tax losses. Be careful not to chase heat. It can be easy to sell what’s done poorly and reinvest in what’s done well. But no one investment style or category leads forever. Stick to your benchmark and maintain your diversification. And if your benchmark contains a 5% weighting in energy you should have close to that invested in energy as well (not 0%, but also not 20% – each of those carries too much risk). Whether you think any one stock, sector, or fund still has room to rise or fall, remember you can always be wrong. Even the best investors are often wrong about timing. You don’t want to be caught on the wrong side.
Focus on your total return. Most investors want to compare their portfolio’s overall performance to how each individual investment performed. They want each individual stock, bond or fund to perform as well or better than the whole. But this isn’t how portfolio construction should work. There should always be stocks in your portfolio that perform vastly different from each other, and similar to their respective categories. If they don’t then you’re probably taking too much risk. Review the point above. This is the concept of diversification and it is immeasurably important to meeting those financial goals. Don’t always look to sell the underperformers. Focus on the total return.
Donate Stock, Not Cash. Finally, for those whose year-end goals include making donations to the charitable organizations you support, consider donating appreciated stock instead of cash. It’s easier than you may think and saves you money. Say you own a stock for which you paid $1,000 that’s now worth $2,500. If you sell that stock, you’ll have to pay taxes on the $1,500 gain. If you have a 33% combined tax rate, that’s $500 you’ll owe just to the government, leaving only $2,000 for the charity. Yet if you donate the stock, you will owe no taxes and the charity receives $2,500, and you have a $2,500 tax deduction. A win-win for you and your favorite charity!
We hope you had a great year and we look forward to working with you in 2016. From all of us here in the Stock Yards Bank & Trust Wealth Management Group, Happy Holidays!