It's been a challenging year for investors. In today's second installment of the 2011 edition of Year-end Money Moves, we look at some actions that you should consider before the end of the year. They also could help take some of the unnecessary year-round thrills out of investing.
As noted in first segment of this year's series, many investment moves also have tax considerations.
But don't let the tax components be the major determinant of your investment moves. Do what's best for you and your portfolio, both now and throughout the year, based on your personal financial situation and your long-term goals.
Reassess your risk: A volatile market is not for the weak. And 2011 saw a lot of folks jump off the crazy stock market train. That's OK.
Yes, great risk can produce great rewards. It also can produce ulcers. If you're more comfortable with safer investing options now, then you do what you've got to do.
But while you can't take the risk out of investing, you can manage it to a degree. Most investment risk falls into two categories, systematic risk or nonsystematic risk. Here's how the Financial Industry Regulatory Authority (FINRA) describes them:
- Systematic risk is also known as market risk and it affects all companies, regardless of the company's financial condition, management or capital structure. Inflation and interest rates are two common systematic risks.
- Nonsystematic risk is associated with investing in a particular product, company or industry sector.
FINRA has more on managing investment risks, but one of the best ways is our next tip.
Reallocate and diversify: Whether the economy and markets are good or bad, periodically taking stock (no pun intended) of your holdings is critical. If you haven't been keeping close watch on your investments this year, take time now to determine whether your holdings still meet your needs.
Generally, you should spread your assets among different investments and asset types to reduce risk, since different sectors perform well under different market conditions.
It's only human to want to invest more in holdings that do well. Congrats on picking a winning stock or sector. But that one investment might now represent a greater share of your portfolio than you originally intended. And that could mean it's time to reallocate your holdings so that they more appropriately meet your ultimate investment goals.
Cash out your winners: Your rebalancing probably will involve selling some assets that have done well. You can use those profits to treat yourself or, if you're a committed investor, buy other holdings that fit your long-term goals.
But cashing in on winning stocks has a downside. Uncle Sam will get a piece of your profit.
Long-term profits, however, are less tax costly. If you've owned the asset for more than a year, it's subject to capital gains rates which for most investors are substantially lower than ordinary income tax rates. Through 2012, the top capital gains rate is 15 percent; for those in the 10 percent and 15 percent tax brackets, there are no tax costs.
Harvest your losses: Some folks also had more than a few holdings that didn't do so well. There is some good tax news, though. You can sell these stock dogs and use the capital losses to offset your capital gains.
What, no or very few gains? I've been there. But when you have more losses than gains, you can use up to $3,000 of your excess bad investment results to reduce your ordinary income.
Got more than $3,000 in losses? You can carry those forward to future tax years.
Pay attention to distributions details: Most of us own mutual funds. Mutual fund ownership is easy and can be profitable.
If things go as planned, mutual funds pay capital gains distributions. These are the portion of money each fund owner made when the fund's manager sold assets throughout the year. And every shareholder has to pay taxes on those earnings, referred to as capital gains distributions.
Official word on the tax damage you could face will arrive early next year when you get your annual account statement. Instead of waiting until then, call your broker or fund company now to get an idea of what you might be facing.
If it's enough to produce a substantial tax bill, you can account for it in the estimated tax payment due in January.
You also need to be aware of mutual fund costs if part of your portfolio rebalancing includes adding a fund or two. Don't buy until after the fund makes its year-end payout. If you purchase just before the distribution date, you'll also be buying yourself a tax bill on your new fund's payout.
Watch out for wash sales: You sold a losing stock and now you're having second thoughts. The asset is starting to show some life.
Hold on. If you buy it or another asset that's substantially the same within 30 days before or after you sold the losing stock, that's known as a wash sale.
In this instance, the IRS won't let you immediately deduct your original loss amount. You don't lose it, but the deduction of your loss is postponed to a later date.
Here's hoping that some of these moves can help you shape up your investments and lower your 2011 tax bill.
And remember to check back here tomorrow for part 3's look retirement moves to make by Dec. 31.
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