NEW YORK – For most investors, 2016 was a very good year.
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And if you're sitting on some fat gains in your portfolio with the market marching through record after record, you might be tempted to leave well enough alone.
"In a strong bull market, it's easy to sit back and watch your balance grow," says Christine Benz, director of personal finance at Morningstar. "But this is actually a very opportune time to look and think about making some changes."
Another reason to give your portfolio some attention now: once the clock hits midnight on December 31st, you'll have missed the window to make some crucial changes that can pay off down the road.
So before you ring in the new year, consider making the following moves.
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Stocks went wild post-election, and bonds took a nosedive. So chances are that your asset allocation, meaning the percentage you keep in stocks vs. bonds, has gone way off course. For example, if your goal is to have a portfolio with a 60-40 stock-bond mix, you might have a much higher percentage in stocks now. Rebalancing restores your original asset allocation.
"In most cases, a well-diversified portfolio will have grounds for rebalancing right now," says Tim Maurer, director of personal finance for the independent adviser group BAM Alliance.
It's important to make sure that your allocation reflects how much risk you're willing to take. Especially for older investors nearing retirement, a stock-heavy portfolio may be risky, says Benz. "You might think it's not a good time to buy bonds, but it's important to remember that you're holding them not so much for return as to be shock absorbers," she says.
Moreover, rebalancing forces you to sell appreciated assets at a high price, and pick up laggards at a discount.
HARVEST YOUR GAINS, AND MAYBE YOUR LOSSES, TOO
If your income is in the 15 percent tax bracket (in 2016, that's up to $75,300 for a couple) or below this year, perhaps because of a job loss, or retirement, you can sell shares of appreciated funds and pay no taxes on the gains. Most other investors will pay a 15 percent rate on long-term capital gains.
On the other hand, while your portfolio as a whole might be up by double-digits, a few specific sectors, like long-term and municipal bonds and some emerging markets, have had a pretty rough ride in recent months.
If you've lost money on any funds or ETFs, you can sell them and use the losses to offset any taxes you may owe on investment gains. And you can write off up to $3,000 of losses per year against your income. Just heed the wash-sale rule, which says that you can't buy the same or similar securities within 30 days of the sale, or the IRS will disallow the write-off.
If you're harvesting gains, you don't have to sweat the wash sale rule. Feel free to immediately buy back the exact same securities at a higher price, which would give you a higher cost basis the next time you want to sell.
DONATE APPRECIATED ASSETS
December is the peak month for charitable donations. If you're looking to make a gift, you can also get a tax break by making the donation in the form of shares of stocks or mutual funds. In general, you can claim the current market value of those shares, no matter how much they've gained since you bought them, without paying a cent in taxes.
This year, that tax-saving move merits some extra attention. President-elect Donald Trump has indicated that he wants to cut tax rates especially for higher earners. That could potentially trim the value of future deductions. "You'll get a bigger bang for your buck while you're paying higher rates," says Benz.
If you want to grab that tax break, but aren't sure where you want to direct a donation, consider opening a donor advised fund (DAF), available at major brokerage firms like Schwab and Fidelity. With a DAF, you donate the shares and claim the tax break on the full amount today, but parcel out the actual gifts over time.
"People think this is a millionaires-only strategy, but it's not," says Benz. You can open a donor advised fund for as little as $5,000, and some firms are even equipped to handle donations of illiquid assets, such as shares of a private company, she notes.
MAX OUT YOUR RETIREMENT CONTRIBUTIONS
In 2016, you can contribute a maximum of $18,000 to your 401(k) plan - plus an extra $6,000 if you're 50 or older. If you qualify for a year-end bonus, find out if you can stash a portion of it in your plan. Keep in mind that any money that you put in your 401(k) this year won't count toward your 2016 taxable income.
Maxed out your 401(k) and still sitting on some extra cash? Pad your retirement savings further with a Roth or traditional IRA. For 2016, you can put in up to $5,500 ($6,500 if you're 50 or older). You have until the April tax-filing deadline to make the contribution.