Get Your Investment Portfolio on Track for the New Year: 5 Tips for Reviewing and Rebalancing
The new year is an excellent time to reevaluate your investment portfolio. Periodically reviewing and rebalancing your investments can align your strategy with your financial situation and goals and ensure you are on track to meet your long-term financial objectives. If you find this process challenging, a financial advisor can provide valuable insights and expertise on the best investment strategies and asset allocation for your unique financial situation and help you navigate the often-complex world of investing.
Here are five tips to help you review and rebalance your investment portfolio at the beginning of the year:
1. Assess your current financial situation.
It's essential to regularly review your financial situation to ensure that your investment portfolio aligns with your current needs and goals. For example, consider any changes in income, financial objectives, or risk tolerance. By assessing your current financial situation, you can determine whether your current investment portfolio is appropriate and make any necessary adjustments.
2. Determine whether your asset allocation is appropriate.
Your asset allocation refers to the mix of different types of assets in your investment portfolio, such as stocks, bonds, and cash. It will depend on your financial goals and risk tolerance. For example, suppose you are saving for retirement and have a long time horizon. In that case, you may want to allocate a more significant portion of your portfolio to stocks, which have the potential for higher returns over the long term but also carry more risk. On the other hand, if you are closer to retirement and have a lower tolerance for risk, you may want to allocate a more significant portion of your portfolio to safer assets, such as bonds. By reviewing your asset allocation, you can determine whether it is appropriate for your financial goals and risk tolerance and make any necessary adjustments.
3. Rebalance your portfolio as needed.
Over time, the value of your investments may change, causing some asset classes to become overweight or underweight in your portfolio. For example, if a particular stock or mutual fund has significantly outperformed the others, it may become too large a position in your portfolio. Similarly, if one has underperformed, it may become underweight in your portfolio. Therefore, it's important to rebalance your portfolio periodically to ensure that your investments are adequately diversified and aligned with your financial goals. To rebalance your portfolio, you may need to sell some assets that have become overweight and use the proceeds to buy the assets that have underperformed.
4. Consider tax implications.
When selling investments, you must consider the potential tax consequences. In general, selling at a loss is more tax-efficient, as you can use the capital loss to offset capital gains and lower your tax bill. On the other hand, if you sell investments that have appreciated, you will likely trigger capital gains on the sale. Additionally, it's critical to consider whether it makes more sense to sell taxable or tax-deferred investments. Taxable investments, such as stocks and mutual funds held in a brokerage account, are subject to annual income taxes on interest, dividends, or capital gains earned. On the other hand, tax-deferred investments, such as 401(k)s and traditional IRAs, are only subject to income taxes upon withdrawal. By being mindful of the income tax implications, you can minimize your tax burden and maximize your investment returns.
5. Refine your long-term goals.
While regularly reviewing and rebalancing your portfolio is important, keeping your long-term financial goals in mind is also essential. Avoid making rash decisions that could potentially harm your long-term financial plan.
By following these tips, you can ensure that your investment portfolio is on track and that you are well-positioned to achieve your financial goals in the new year and beyond. If this sounds too intimidating to implement alone, working with a financial advisor can help you feel confident that you are making informed decisions about your investments and are well-positioned to achieve your financial goals in the new year and beyond.
About the author:
JP Geisbauer is a Certified Public Accountant and a Certified Financial Planner ®. He is the founder of Centerpoint Financial Management, LLC, a financial planning, investment management, and income tax planning firm located in Irvine, CA. If you have specific questions regarding your situation, please schedule a complimentary 30-minute call here.
Disclaimer:
This article is for general information and educational purposes only. Nothing contained in this article constitutes individual financial, investment, tax, or legal advice. Before taking any action on any topic discussed in this article, please consult with your own financial planner, investment advisor, tax professional, and/or attorney for advice on your specific situation.