5 Financial Tips for Year-End

As the end of year approaches, there are several things investors may consider doing to ensure they are putting themselves on the best possible financial footing as we move into 2017.

1. Max Out Your Retirement Plan Contributions

The easiest money you will make in 2016 (or any year) is the tax savings you will generate by contributing the maximum amount possible to tax-deferred retirement plans such as IRAs, 401(k)s or defined benefit plans. Those with high income from self-employment are in a particularly good situation to reduce their tax bill. Individual 401(k)s, SEP-IRAs and Defined Benefit Plans (and the high tax-deductible contributions that go with them) may all be fair game for the self-employed. Make sure you have set up the most advantageous plan for your situation. For more on this topic, see our previous blog post here.

2. Realize losses in your taxable accounts

If you have realized capital losses in any of your investments, you can use them to offset any realized capital gains. If your realized losses exceed your realized gains by $3,000 or more, you can offset $3,000 of your taxable income with your capital loss. Any realized losses above $3,000 can be carried over to successive tax years. In general, if you must realize capital gains, try to make them long-term gains, which are taxed at a lower rate than short-term gains. You must hold securities for a year and a day in order to qualify for the lower capital gains tax rate.

Also, be strategic about when you buy or sell mutual funds in taxable accounts late in the year. Typically, most funds make their capital gains distributions in the last few months of the year. Be careful not to buy into a fund that is just about to make distributions—as you will receive taxable distributions that did you no good whatsoever! In taxable accounts it is usually better to buy into funds after they have made their annual distributions and to sell any funds before they make distributions.

3. Know (or Reassess) Your Tolerance for Portfolio Risk

Knowing how much investment risk you can comfortably withstand is critical, and can help you from making very damaging decisions when the markets take their occasional tumble. Typically, investors with higher tolerance for risk and longer investment horizons can afford to have more of their assets invested in equities, while those with lower tolerance for risk and volatility should have a greater share in fixed income securities. Also, a change in personal circumstances can also warrant a change in the risk/reward level of your investments. For example, if you are undergoing a career transition it may be wise to reduce the risk in your portfolio until you are established in your new career. 

If you have undergone or will undergo a major change in circumstance, contact us to see how we can help.

Balance your portfolio risk

4. Have a Rebalancing Plan (and stick to it)

Periodically rebalancing your portfolio to its target asset class weightings can make the process of “buying low and selling high” systematic and unemotional. Emotionally, it is easier to add to whatever asset class has recently done well and to sell that which has done poorly. In the long run, however, it is better to add to worthy assets classes that have become cheap and to reduce exposure to asset classes that have become relatively expensive. Regular rebalancing will also help to prevent you from becoming over-exposed to any particular asset class.

5. Resolve to Play the Long Game When it Comes to Investing

Most people are investing today to build a retirement nest egg that will be tapped decades in the future. Thus, worrying whether the stock or bond market was up or down this week or month is unproductive. Market pullbacks should be seen as opportunities to add to investments when they are temporarily cheaper, not as reasons to sell. Knowing your risk tolerance, employing a rebalancing plan and having a long-term focus do wonders for helping you rest easier today.

To find out more about how we can help you put these and other tips to work, contact Peter Thoms at: thoms@orionportfolios.com  or call: 619-435-1701.

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