The New Year is just around the corner, which makes it the perfect time to do a bit of portfolio housekeeping.
The New Year is a good time to take stock of your portfolio. Here are some tips on what to look at, and set yourself up for a good time down the road.
By investing a little bit of time now, you can enhance your tax situation, save some money, and set yourself up for a smoother ride down the road. Break out the eggnog or hot chocolate and take these five easy steps to help you get off to a great start in 2016.
As humans, we have a tendency to hang onto losing stocks long past their expiration date. Even if a stock's value declined long ago -- with no signs of a reversal -- it can be difficult to admit it wasn't a good investment and simply cut your losses. We just don't like to lock in losses and essentially admit to a mistake, so we keep those stocks in our portfolios and ignore them.
However, doing nothing is not going to help your portfolio or your finances. Instead, sell the losers before year-end and take the tax loss. This will help offset any gains you realized from other investments or from your overall income. Known as a tax loss sale,selling your losing stocks is effective because it allows you to reap some benefits from an otherwise somewhat painful situation.
While investigating which stocks need to go, take a few minutes to check your accounts for duplicates. This might come in the form of two accounts that have the same end goal (two separate IRAs, for example) or more than one mutual fund investing in the exact same thing. This is far more common than you realize, so don't be surprised if you find something. Duplicates make it easier to lose track of your strategy or allocation, and they also make it easier to spend more money than you should.
Where you have more than one account serving the same function, see if you can't combine them into a single one with your cheapest custodian. Similarly, cull your mutual funds and other investment vehicles so that you're not paying two different managers to carry out the same exact strategy. The key is to focus aggressively on picking the single cheapest option. This will have an immediate effect on the fees you pay (making it easier to outperform) and will also simplify your life so that it's easier to keep track of how your portfolio is doing.
Many people get raises in January, so now is the perfect time to put in a request to raise your 401(k) deduction. Doing it before your raise kicks in means you'll never see the extra money you're making -- this, in turn, will make it much easier for you not to miss that money.
Think of the alternative: if you get a raise and spend the extra money for a few months before raising your contribution, it's going to be a lot more painful. Suddenly, that extra padding you had in your budget is no longer there! Now, imagine you wait a couple of years before raising your contribution. Even harder.
Instead, raise your contribution to coincide with your raise in pay. You'll never miss the extra money, and your 401(k) will get an extra boost each year as your salary rises.
With the exception of the SEP IRA, year-end is also the deadline to open an IRA account. Whether you've already maxed out your 401(k) or are saving for the first time, an IRA is a superb account to build tax-advantaged savings for retirement. It's especially important and powerful for those who work outside of the 9-to-5 namely freelancers, stay at home parents, or small business owners.
It can be easy to overlook anything dealing with taxes (including qualified retirement plans) until tax time, but by then it can be too late. If you don't already have an IRA in place, take the time out to at least open the account. You can always work out your contributions later, but at least you'll have a head start and a place to send your savings.
Especially since you're probably looking at them anyway, now is the perfect time to make sure your financial and estate planning information is up to date. Check your beneficiary designations, contact information, and other pertinent details. This is especially critical you've had a major life change this year. You might need to add a new child to your trust, update your will for a change in your wishes, or make sure your insurance policies and lists of accounts are updated and filed in a place where a loved one can find them.
These aren't the most pleasant things to think about, but if anything should go wrong in 2016 you'll want your family to be protected and prepared. These are small actions that can reap benefits over the long run, just like most of our financial planning activities. Cleaning up your investment accounts for the New Year is neither particularly grueling nor time consuming, but it's an incredible gift for both your family and your future.
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