At the end of the year, it’s time to clean up your investments and get ready for the new year, and your tax return. December is when you need to evaluate your winners and losers, and decide what to keep and which investments to cut loose. This is not a decision to be made lightly; there are many factors to consider.
Most people take their losses by December, so they can claim the loss on their tax return just a few months later. However, this might not be the best plan. If you’ve had a bad year in your job, maybe even got laid off, you already have a small income this year. If this was a low income year for you, it might be better to postpone your tax loss until January. The next year may be better, you may find a new job, and you will want the deduction in the more profitable year.
If you sell for a loss, do not buy the same stock back for more than 30 days. Buying back within 30 days is called a Wash Sale and will prevent your deduction from being allowed. In any case, only sell your losses if you really feel they’re not good investments. Don’t just sell for tax purposes.
The same reasoning applies with gains, in reverse. If you’ve had a really good year in your job, bonuses and profits this year, then postpone selling to take your gains after January 1st in the new year. This will defer any taxes on those profits for another 15 months.
Review Your Investment Strategy.
Take a second look at your strategy. If this wasn’t a good year, then examine why. If things went sour because of unexpected events, then maybe your strategy is still sound. You can’t fault yourself for Apple releasing a failed iPad product, BP’s oil spill, or for Bank of America involving itself in a faulty real estate scheme. You also can’t blame yourself for geopolitical problems that may have caused a hiccup in your portfolio.
However, if you’re picking out penny stocks that don’t pay off, or shorting gold as it continues to rise, then you need to reevaluate your plan. Look at any losers and see if they’re worth the wait. Trim the hedges, so to speak, and get rid of dead wood.
Evaluate your portfolio and see if the new year can bring you some better diversification. If you have 90% stocks, all banking and oil, then you’re too heavy in one or two sectors. First you need to add more than stocks to your investments; perhaps gold, forex or a commodities fund. Second, your stocks need to cover more than just two sectors. Branch out into many “opposing” sectors. To balance oil stocks, buy airlines or transportation. If oil falls, transportation will still benefit.
After the year runs out, and you’ve done all your December buying and selling, look at the new year. January is the time to plan for the upcoming year, and get things in gear for a profitable investment plan. The older you get, the more conservative your portfolio should be. After the age of 50, you should have almost half your money in cash instruments. Each year, you should scale back risk a bit more. Start planning now for the next year, and even two years ahead.