Most new-year financial advice is useless because it applies to so few people.
This, therefore, will not be your standard start-of-the-year, how-to-handle-your-portfolio story.
The turn of the calendar is the perfect time to clean up your holdings and give yourself both a literal and figurative clean slate. Before we move in that direction, let’s review the norm.
Standard advice revolves around tax-loss selling, the process of selling losers held in taxable accounts in order to capture the tax benefits of losses. Losses can be used to offset gains in other securities – which is why tax-loss selling is often done at year-end, and involves matching losers against winners you want to sell – so that the losses cancel out some or all of the profits, thereby minimizing taxes; losses also can be used to offset a limited amount of income.
If you did not go through the process at year-end to get the tax advantages as soon as possible, know that the strategy actually works any time you are making changes, with the tax benefits basically holding until you file the tax return for the time when the move was made.
The reason that year-end tax-loss selling advice is ineffective for most people is that there just aren’t many losses to go around.
Even after the fourth quarter of 2018 turned the market sour, the reality is that a long bull run lasting more than a decade now has made it so that anyone who has stuck around long enough in the stocks and mutual funds they own almost certainly is on the plus side of the ledger.
So while taking advantage of losses – if you have any – makes sense, most people should look at their portfolio with less focus on tax law and more scrutiny of their own needs and wants.
That being the case, answer the following questions about your portfolio now, knowing that making changes and clean-ups based on your answers will improve your holdings and your attitude toward them. And, remember, some of the moves you want to make will have tax consequences; now – as at any time of year – limit if you can the amount you will owe Uncle Sam.
1. What’s “wrong” with your portfolio as it exists now?
Yes, the cynic in you will suggest that it simply doesn’t have enough money, but this is more about your portfolio construction.
Consider key investment factors, such as the balance between stocks and bonds, the overall volatility you’ve seen riding out good and hard times, and more, but recognize that the essential underpinnings of strategy don’t get way out of whack for long-term investors who maintain control.
If the portfolio no longer matches the allocation you planned for it – say you were looking to maintain a 60-40 balance between stocks and bonds but years of strong market gains have you now standing at 75-25 – re-examine the plan and determine how to best get back to it.
Rebalancing involves selling things that have grown faster than expected and buying into things that have moved more slowly; that’s about discipline rather than market results.
Beyond that, consider what makes you uneasy about your portfolio.
Perhaps you have a huge chunk of assets in one or two securities (you need balance and diversification), you own spin-off shares where something you hold generated a small sister position you don’t know how to handle in companies you barely recognize (sell, unless you want to buy much more).
If you have funds or stocks you have lost faith in or aren’t excited about, you don’t have to hold them for life.
Identify what bugs you and exterminate the problems.
2. Has your portfolio evolved with you; would you buy everything again today?
Many investors build collections, buying what appeals to them and seldom add to past purchases.
Now their portfolio is an amalgam of the occasional stars with has-beens and laggards, rather than something where every piece has a purpose and a job.
A few years ago, I realized that every security I own requires the same brain space — I evaluate everything the same way — no matter how much money it represents. I held a few positions – mostly purchased fresh out of college with maybe a few hundred bucks – taking up more evaluation time than they were worth.
Avoiding capital-gains tax was my reason to hang on, but these holdings stopped holding a big chunk of my assets or my interest.
That led to my personal “1 percent rule” where any security that is not at least that much of my portfolio requires action: invest enough to get it past the minimum or sell it and use the proceeds to reinforce something worthy of being a large holding.
This forced me to clean up my portfolio — biting the bullet on taxes was easier than expected — and still requires the occasional decision. It properly sizes my trades and improves my control and decision-making; at some point, my threshold may go up, forcing more decisions but further consolidating and clarifying my portfolio.
If you no longer like what is in your portfolio – if you would not buy it again today and hold it in roughly the same weighting as you do now – making a change will improve your control and your mood.
3. What stops you from making changes?
These decisions are based more on your emotions around controlling the portfolio than on recent performance. It’s not that results don’t matter, but cleaning up a portfolio improves confidence and discipline.
Unless you have a concrete reason for staying a course that you know is slightly off track, doing nothing means you’re accepting your portfolio rather than managing it. Taking charge of it is always a good move, no matter the time of year.