The end of the year is a great time to take stock of your stocks, says Laura Cole, director of the Master's Investment Learning Center and a senior lecturer in finance at the Haslam College of Business. Here are four key strategies that Cole, who spent 15 years managing funds for middle-class investors, often advised at year’s end. See how they can also benefit your wallet in the new year.
1) Rebalance Your Portfolio
Over the course of a year, or several if you haven’t re-examined your portfolio in a while, stocks can significantly increase in value—and that isn’t strictly positive for investors.
“If your other stocks are over-dominated by ones that grew significantly, your portfolio carries much more risk,” Cole says.
Over-weighted stocks also can skew the performance of your full portfolio, meaning that you miss the chance to recognize larger gains developing or to sell stocks that are losing. And speaking of stocks that are losing…
2) Harvest Your Tax Losses
Selling stocks that are performing poorly can mean gains come tax time. Cole notes that many investors are afraid to sell poor performers because it means accepting a loss. “We call it chasing the loss,” she says, “And it’s highly common for the average investor.”
Cole recommends taking emotions out of the equation or reframing the sale mentally. Pruning your portfolio of lagging stocks allows room for greater growth, and selling at a loss before December 31 means a tax win in April.
3) Gift (Tax Free) Until it Hurts
It’s the season of giving, and making substantial financial gifts is another way to decrease your tax burden in 2018. Most Americans already take advantage of the tax benefits of contributing to 501C3 charities, but Cole advises examining how much you have given over the course of the year and determining the amount you can contribute before December 31 to increase your tax benefit.
Cole also notes that contributions to a 529 college education savings account merit tax deductions, and while they might not generate as much excitement as a new toy, they are a gift that will benefit children’s futures perpetually.
4) Use Year-End Bonuses to Pad Your Portfolio
Though in a lot of offices the year-end bonus has come to be expected, traditionally they were a surprise financial boon. If you plan your holiday shopping and celebrating as if you weren’t going to receive a bonus, you can begin the new year by planting a financial seed in your portfolio or padding your retirement fund. Even if you can invest part of your bonus, you’ll be starting off the year ahead, and by this time next year you’ll have another potential financial boon in the investment’s growth.
Katie Williams (865-974-3589 firstname.lastname@example.org)
Laura Cole (865-974-1715 Lscole@utk.edu)