Portfolio rebalancing and tax moves to make
EDITOR’S NOTE: This article is the last of a fourpart series that pertain to year-end financial planning.
As stocks are soon to exit calendar year 2017, if you haven’t done it already, now might be a good time to consider conducting a personal financial checkup. Some items on that list might include the following. Rebalance your portfolio. Let us assume that five years ago after analyzing your financial situation and setting aside an adequate amount of money for emergencies, vacations and short-term liquidity needs, you determined that approximately 65 percent of your remaining assets should be in the stock market with the balance in bonds. For illustration purposes, let us assume that your portfolio totaled $100,000. This would imply a $65,000 allocation to stocks and $35,000 to bonds as of the close of calendar year 2012. Due to the approximate eighty percent rise in stocks during this period coupled with approximate ten perrcent return in bonds as represented by the Barclays US Aggregate Bond Index and assuming you kept pace with both averages, your portfolio would now total $155,500 and consist of $117,000 or 75.25 percent in the stock market and $38,500 or 24.75 percent in bonds. Assuming none of your objectives changed the prudent move would be to rebalance your portfolio back to the originally intended weighting of 65 percent/35 percent. This would be accomplished by shifting $15,925 from the stock portion of your portfolio into the fixed income portion. The net result would now be $101,075 or 65 percent of the $155,500 in the stock market and $54,425 or 35 percent of the $155,500 in the bond market. Sounds like selling high and buying low to us, not a bad idea.
Take advantage of your employer sponsored pension plan such as the 401(k), 403(b) or 457. If available and if you are not doing so already begin to contribute to your employer sponsored pension plan at least up to a percentage that will maximize their matching contribution, if any. For individuals under the age of fifty the maximum amount that you can contribute is $18,000. However for those of us “lucky” enough to be fifty or older, the Internal Revenue Service allows an additional $6,500 as a catch-up contribution.
Fund your IRA. If you do not have an employer sponsored pension plan available where you work, maximize your Individual Retirement Account. For calendar year 2016 the Internal Revenue Service has determined that the maximum contribution for individuals under the age of fifty is $5,500 while those over fifty and older can contribute an additional $1,000. Furthermore, you have until the normal tax filing deadline of April 15th to fund your 2017 IRA. Pay yourself first.
Get religion. No, not in the spiritual sense but have faith in a well thought out and constructed investment plan. It is no wonder that the average investor severely underperforms the indices. They watch the market on a daily basis. They react to the devastating emotions of fear and greed and they listen to all of the talking heads. Turn the television and radio off (except listen to us every Sunday morning from 10:00a – 11:00a on Radio 810 WGY and 103.1 FM [yes that was a selfless plug]) and spend more time with your family or doing the things you love and less time tracking each and every movement of the market. You will certainly be much less stressed out and most likely get better returns on your investments.
Begin to get your tax information together. What better way to begin to get an idea of what is coming in versus what is going out than assembling last year’s financial data. In addition to your tax information, get your checkbook out and review that. Assemble all of your credit card statements. Are you dining out too frequently? Are you hitting the ATM machine on a regular basis and spending money on items you could cook or brew at home? Watch the pennies and the dollars will take care of themselves.
Review all of your insurances. It’s the truck you don’t see coming that hits you! Get your insurance policies out and make certain that you are protecting your most important assets. If in retirement, check out long-term care insurance or perhaps a trust or a program of gifting. If your future earned income is your biggest asset, make certain that you have adequate life and disability income insurance. We prefer term the majority of the time. Don’t forget your home and business. An adverse liability judgment will dig you a hole you might never crawl out from. Make certain you are adequately covered.
The bottom line. During these cold winter months review your finances from top to bottom in an effort to construct a financial road map. You must first determine where you are to plan where you are going. If you don’t you are leaving your financial future to chance. Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, please call 518-279-1044.