Yesou’ve probably heard this advice before: Check your investment portfolio mid-year to make sure you’re on track to meet your goals. But this year it’s above all important.
Financial markets have given investors a roller coaster experience over the past year. In 2021, the stock market continued to reach record highs and buying risky options like cryptocurrency and SPACs paid off. The outlook is very different today. The S&P 500, an index commonly used as a benchmark for overall stock market performance, fell into a bear market in June, meaning it fell at least 20% from its most recent high. Winners of pandemic stocks like Peloton and Zoom have seen their prices fall by more than 70% and 40% respectively this year, and 10 of 11 S&P 500 sectors have fallen in 2022.
For new investors and seasoned pros alike, volatility can be scary. Fortunately, experts say reviewing your portfolio regularly — like once a quarter or every six months — can go a long way in setting you up for long-term success. Now that we’re halfway through 2022, it’s time to take that step.
“It’s been a year like we haven’t seen in recent history,” says Lauren Wybar, senior wealth management advisor at Vanguard. “It’s unusual compared to what we’re used to.”
Here’s what to look out for when doing a mid-year portfolio review.
If you take a few smart tax moves this year when the market is down, you might be able to save on your tax bill in April.
“Taxes are really the biggest expense that a lot of people incur,” says Charlene Wehring, CPA and founder of Wehring Wealth Management. “Every decision you make in your financial plan has some sort of tax consequence.”
Wehring recommends checking to see if you have any losses in your portfolio that could be offset by collecting tax losses. Essentially, tax loss harvesting allows you to sell an asset when its price is lower than the price you bought it at and use that loss to offset gains elsewhere in your portfolio. This can be a useful decision because every time you sell an asset like stocks or cryptos, you have to pay taxes on the profits. The IRS allows taxpayers to count up to $3,000 of ordinary income losses against their gains and carry the losses forward to future years if necessary.
If you decide to harvest at a tax loss, keep in mind that there are restrictions. You cannot sell an investment when its price is falling and buy it back immediately – or a “substantially identical” one – immediately. Make sure the benefits outweigh the risks for your specific financial situation.
Another decision to consider when checking your mid-year portfolio this year is converting to a Roth Individual Retirement Account (IRA).
A traditional IRA is funded with pre-tax dollars and you pay taxes on your withdrawals over time. But a Roth IRA is funded with after-tax dollars, so when you withdraw your money after age 59½, you don’t have to pay taxes on those withdrawals. If you want to benefit from tax-free withdrawal of your money, you may want to consider converting your IRA to a Roth IRA – and since you have to pay tax on the money in this account, it may be best to do so now. . , when your balance is probably lower than it has been and will be in the future.
“They are able to convert with fewer consequences,” says Wehring. “As the market goes up, your Roth will recover tax-free.”
A mid-year review is also the perfect opportunity to check that your investment portfolio is still in line with your goals, risk tolerance and time horizon. A volatile market is a particularly good time to do this, as you can reassess how comfortable you are with your portfolio in the face of market turbulence.
Have falling stock prices made you panic about having enough money for an upcoming expense, like buying a house? If so, it could be a sign that it’s time to take a little risk on the table and confirm that you have enough cash available during your mid-year save to continue weathering this storm.
In most cases, an investor should have a predetermined long-term investment risk tolerance and goal that shouldn’t change just because the markets move, says Thomas Martin, senior portfolio manager at Globalt Investments. But investors should regularly rebalance their portfolios to ensure they are aligned with these initial goals.
Rebalancing refers to buying or selling assets so that your portfolio allocations are in line with your investment plan. By doing so, investors can ensure that they maintain a diversified portfolio with a mix of stocks, bonds and cash that suits them. A diversified portfolio can provide protection because when one sector of your portfolio tumbles, another different asset may be able to hold steady. For example, in March 2020 stocks fell while Treasuries held firm.
Of course, sometimes financial markets crash – this year even the classic portfolio of 60% stocks and 40% bonds took a hit. However, having a diversified portfolio means that when the markets recover, your portfolio will include a variety of assets that recover their value and will not be concentrated in one space.
In short, it’s a good idea to check, especially when the markets are volatile like they are right now. But investors should not make rash decisions based on price movements.
“It’s really about them and their needs and not all the noise in the market,” says Martin.
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