End-of-year portfolio management advice


As we approach the end of another successful year in the stock markets, it’s important to take the time to look after your investment portfolios. A few simple activities can optimize the after-tax return on your portfolio and set you up for success for the year ahead.

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Manage risk

Over the past three years, risk assets have produced strong returns. The increase in the market can increase the risk in a portfolio by changing the asset allocation. It can happen knowingly, or sometimes without knowing it. For example, if you had a portfolio of 60% stocks and 40% bonds at the start of 2019, today without rebalancing, your allocation would have drifted to 72% stocks and 28% bonds. The risk profile of the portfolio has changed.

Now is the time to revisit your financial plan and reassess your goals and objectives. By understanding the risk profile of your portfolio, you can rebalance accordingly to manage that risk.

Crop losses

Rebalancing is an important concept in portfolio management. And, when managing a taxable portfolio, recovering tax losses can be an equally important concept. Throughout the year, trading activity is generally required in order to rebalance the portfolio and to raise liquidity for distributions. These activities may result in the realization of taxable capital gains. In addition, many UCIs distribute capital gains at the end of the year.

As capital gains accumulate throughout the year, it is important to review your portfolio for positions that are trading at a loss. “Harvesting” these losses to offset the gains has economic value and can optimize your after-tax returns. If you remain convinced of the asset and still want to be exposed to it in your portfolio, you can put it back into the portfolio after 31 days to avoid the wash-sale rule.

Manage mutual fund capital gains distributions

A key to portfolio management is to avoid surprises. While actively managed mutual funds can be effective tools for capturing exposure to particular asset classes through the expertise and risk controls provided by professional fund managers, one downside is of actively managed mutual funds is that they are required to distribute realized capital gains throughout the year. to their fund shareholders.

There are a few activities that can help you navigate these distributions and avoid tax surprises. Keep an eye on the communication of the fund companies you hold in your portfolio. Typically, starting in October, fund companies publish estimated year-end capital gains distributions and the dates associated with those distributions. Knowing this information as early as possible will help determine if action can be taken in light of the distribution. Depending on the capital gains implications of selling the fund, it may be a good idea to do this before the distribution registration date.

Plan next year’s expenses

For investors who have benefited from the market surge in 2021, it is important to look to next year for anticipated expenses which can be immune by raising cash now. Factor in the income and dividends your portfolio is expected to receive between now and your future expenses, and consider increasing the rest of what you will need by reducing or selling assets. If capital gains are a consideration, splitting sales between late 2021 and early 2022 could be an effective strategy.

As the saying goes, “a bird in a hand is worth two in the bush”. Cutting gains to raise cash now for a known expense in the future is a smart way to lock in gains and eliminate the risk of selling assets at a lower level if the market experiences volatility between now and the time of. spending.

Taking the time to complete a few simple tasks towards the end of the year can have a big impact on your portfolio over time. And executing these beneficial strategies within your wallet will allow you to relax and enjoy the family vacation knowing that your wallet is ready for success in 2022.

Mike Filing, CFP, ChFC, is Associate Director of Portfolio Management at UMB Bank.

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