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As each calendar year winds down, investors are
often exhorted to get on the stick: to review their port-
folios, rebalance, and scout around for tax-loss
candidates. That’s because Dec.
31
is the deadline for
most tweaks that can affect your tax bill for that
year. Yet, some of these tasks can be at odds with one
another—specifically, what makes sense from a
portfolio standpoint may not make sense from a tax
standpoint, and vice versa. For example, the practice
of rebalancing involves selling winners, while a tax-
savvy investor should be doing just the opposite:
hunting around for slumping positions to sell in order
to generate tax losses. Indeed, a policy of benign
neglect—that is, doing nothing to your portfolio at
all—beats making portfolio adjustments that trigger
unintended consequences.
As
2015
winds down, here are some year-end
portfolio mistakes.
1
Rushing Into a Full-Blown Portfolio Overhaul if You
Don’t Have Time
Yes, year-end is a good time for a portfolio review, in
large part because Dec.
31
is your deadline for
most changes that can have an impact on your tax bill,
like tax-loss selling. But the fourth quarter is a busy
time all around, with major holidays and work dead-
lines cutting into time for portfolio planning. If you
find yourself time-crunched as the year winds down,
don’t try to cram in a full-blown portfolio review.
Instead, think surgically about tasks that will deliver
the biggest payoff—and lower your
2015
tax bill—if
executed before year-end.
For example, make sure you’re contributing the
maximum to your
401
(k) or other company retirement
plan, as the limits apply to each calendar year;
making traditional rather than Roth contributions
brings down taxable income. If you’re on the hook
for required minimum distributions and need to sell
something to shake some money loose from your port-
folio, start with those holdings that have appreciated
the most over the past three or five years. See the
sidebar for a link to an article that provides additional
tips for
RMD
-subject investors. If you hold taxable
accounts, it’s a good bet many of your holdings are
selling above your cost basis. To find the most fruitful
targets for tax-loss sales, concentrate on individual
stocks, as well as emerging-markets, natural-resources,
commodities, and precious-metals funds. If you’ve
realized losses elsewhere in your taxable portfolio—or
some of your funds are making big distributions—you
can use those losses to offset gains or up to
$3
,
000
in
ordinary income.
2
Automatically Kicking Laggards to the Curb
Yet, as beneficial as tax-loss selling can be, it’s a
mistake to put on the chopping block everything
that’s selling below your purchase price. Reversion
to the mean happens, and last year’s portfolio under-
achiever is often the next year’s saving grace. For
example, the soaring equity market that has prevailed
for most of the past six-plus years has led to lackluster
relative returns for otherwise-worthy high-quality
funds, and some individual stocks, too. But such hold-
ings could earn their keep in a weak market, providing
valuable ballast for the more aggressive holdings
that have soared in your portfolio. See sidebar for a
link to a screen for stocks that could fit the bill and
an article that dives for worthy high-quality funds. While
categories like Treasury Inflation-Protected Secu-
rities have disappointed in recent years, you might be
glad you have them in case of an inflationary shock.
That means that you’ll need to balance your quest for
tax-loss sale candidates with portfolio and individual-
security considerations. If you want to unlock tax-loss
sales by selling something that’s depreciated, you
can’t immediately replace it with the exact same secu-
rity unless you’re willing to wait more than
30
days.
But you can maintain similar economic exposure by
replacing your laggard with something like-minded—
swapping an individual master limited partnership for
another one with better prospects, for example,
or selling an individual energy stock and buying an
exchange-traded fund with a heavy position in that
same company.
5 Year-End Portfolio Mistakes to Avoid
Portfolio Matters
|
Christine Benz