This year has proven to be a much better year for investors than 2022, which saw the worst bear market since the global financial crisis in 2007-2008.
The S&P 500 is up by about 21% as of Dec. 13, while the Nasdaq Composite is up some 39%. Technology stocks have bounced back in a big way after a brutal 2022, and the improving inflation picture has brought hope that the hiking cycle for interest rates may be over — perhaps spurring a Santa Claus rally.
With just a few weeks left in the year, now is a good time to take a look at your portfolio, given the wild volatility we have experienced over the past two years. Here are three recommendations to get it ready for 2024.
1. Reassess and reallocate
Last year at this time, the smart move would have been to look for good buys, particularly among beaten-down technology stocks, which had suffered big losses in 2022 and saw their valuations plummet. If you took advantage of those good deals, you might have gotten shares of Apple (NASDAQ:AAPL), which is up 50% this year, or Amazon (NASDAQ:AMZN), which is up 75%, on the cheap.
Considering that most analysts expect below-average returns for the markets and a slowing economy, it is likely that some of the high fliers will come back down to earth, especially those that are overvalued.
As an investor, you should take the time now to check the valuation metrics, particularly for the top performers, to see if they are outside of normal ranges. If they are, it might be an opportunity to dial back and reallocate partial positions to stocks that are a better value, are in more stable or recession-resistant industries, or have more growth potential. You may also want to look at boosting allocations for fixed-income investments, as bond yields should fall and returns should be safe and solid in relation to many stocks.
Further, part of the process should be reassessing your risk tolerance. As you grow another year older, your tolerance for risk might not be the same as it was a few years ago. Thus, you may want more fixed income in relation to stocks than you had before or less aggressive growth in favor of value.
2. Make sure you are on track for long-term goals
Most people invest for some larger goal, usually retirement, but there are other financial goals along the way, like college tuition, for example. If you don’t have a plan for how much you will need for retirement through your 401(k) or some other retirement account, it is a good idea to develop one. There are some very basic rules of thumb to calculate how much you’ll need. For example, one tool offered by Fidelity Investments gives you some guideposts along the way.
Fidelity suggests you should have one time your salary saved for retirement by age 30, three times saved by age 40, six times by age 50, eight times by age 60, and 10 times by 65. Thus, if you’re 45 and you make $60,000 per year, you should have about 4.5 times that amount saved, or $270,000. By age 65, if you made $80,000 per year, you’ll need about $800,000 to retire.
Using this general rule or something similar will give you a sense of where you stand. If you are short of these guideposts, you may have to set aside more money for retirement, and that may involve budgeting your expenses to be able to invest more. It may also require a change in your investment strategy toward something with more long-term growth potential. The same holds true for other goals like college.
The end of the year is a good time to look at where you are on the road to your financial goals and make any changes if necessary.
3. Harvest your tax losses
As the calendar year winds down, so does the tax year, so any moves you make before Dec. 31 will be reflected in your 2023 taxes. As far as your investments go, you should look to see if you can get tax advantages from your losses.
If you have stocks or investments that are underperforming and don’t seem to have a promising future, you might want to sell them before the year’s end to reap the tax benefits of harvesting those losses.
Here’s an example. If you sold long-term stocks or funds at a $20,000 capital gain, you could be taxed at 20% of that, or $2,000, depending on your tax bracket for capital gains. However, various factors could place you in the 0% or 15% tax bracket for capital gains, so it’s a good idea to figure out which bracket you are in if you aren’t sure.
Going back to the $20,000 capital gain, if you also sold assets at a $15,000 loss, that could be subtracted from your gains, and your tax liability for capital gains would be lower. Then you could reinvest in new stocks and assets that have more long-term growth potential. However, this strategy only makes sense if you feel that the investment has run its course for you and has limited upside.
All three of these year-end moves and others should be discussed with your financial advisor if you have one.
