Essential year-end moves for savvy investors: A checklist of 6 tips now

Today’s inflationary climate reminds us why investing is so important. Inflation was 3.7% in September 2023, according to the Bureau of Labor Statistics (BLS). While this is much lower than June 2022 (9.1%), it is still stubbornly above the Federal Reserve’s 2% target.

Some inflation is normal, regardless of economic conditions. But it still erodes your money’s purchasing power, meaning you’ll need more money in the future to buy the same goods and services as today. Investing can help prevent this watering down of your wealth – but it requires regular attention. These essential year-end moves can help keep your portfolio healthy and stay ahead of the inflation curve.

1. Assess and rebalance

One of the most important steps to stay on track with your investment goals is to rebalance. If you are using an online broker, your portfolio may have drifted from your target allocation, especially if you haven’t rebalanced this year.

For example, suppose you are using a 70/20/10 strategy — 70% U.S. stocks, 20% U.S. bonds and 10% international stocks. If you haven’t rebalanced for a while, you may find the investments in your portfolio are quite a bit different from your target allocation.

There are a few ways to rebalance. One option is to sell investments that have grown faster than desired and use the proceeds to buy the ones that haven’t performed as well. Alternatively, you can use new money to buy the weaker performers until your allocation is back in line.

No matter how you rebalance, it’s an important step. As mentioned, it can help keep your portfolio in line with your investment goals and risk tolerance.

2. Optimize your retirement contributions

It’s always a good idea to check your retirement contributions, and this is the perfect time to do it. You can start by reviewing your investments and see if you are currently on track to meet your retirement goals. Some online brokers, such as Fidelity, have built-in tools that help assess whether you are on track.

You should also check the contribution limits for various retirement accounts, like 401(k), IRA and others. Are you contributing the maximum to these accounts? If not, how can you make that happen? If you are over 50, you have the option for catch-up contributions.

Another crucial step is to prioritize the way you contribute to retirement accounts. For instance, it’s generally best to contribute as much as necessary to get the full match from your employer-sponsored retirement plan, if available. After that, consider diversifying your tax strategy by contributing to, for example, a traditional IRA, Roth IRA and brokerage account.

3. Take advantage of tax-loss harvesting

Taxes can significantly reduce your portfolio’s value, which is why it’s important to maximize the tax advantages available to you. For instance, a popular strategy is tax-loss harvesting, which involves selling investments at a loss. Investors can use this strategy to “harvest” up to $3,000 in losses per year. These losses reduce their taxable income for the year.

In addition, there is a rule that allows you to carry some losses into the following tax years. This is possible if your losses exceed $3,000 for the year. Overall, tax-loss harvesting can be a powerful tool for reducing your tax bill.

4. Consider charitable giving

Charitable giving is a great way to help causes that are important to you, but it can also be beneficial for your portfolio. One of the most obvious benefits is that charitable contributions are often tax-deductible. You can generally deduct up to 60% of your adjusted gross income (AGI) with charitable contributions.

One thing to keep in mind is that to deduct charitable contributions, you typically must itemize rather than take the standard deduction. You can do this using Schedule A (Form 1040), to itemize and report your charitable contributions. However, this also means your taxes will be more complicated.

If you plan to deduct charitable contributions on your tax return, be sure to keep relevant records, such as bank statements, credit card statements or a record from the charity with information like the amount and date of the donation. Also, consider meeting with a financial advisor, as tax planning can be very complicated.

5. Leverage technology

Financial technology (fintech) has made it much easier for people to invest and keep track of their portfolios. Wealth management tools like Empower and Mint make it easy to see all your investments in a single dashboard. There, you can track the performance of each investment account, plus changes to your net worth.

Another form of financial technology that helps investors is the robo-advisor. These are online platforms that manage your investments with an algorithm. By using an algorithm instead of humans, robo-advisors offer portfolio management at a lower cost than traditional actively managed portfolios.

Some robo-advisors eliminate the need for rebalancing. In addition, they do tax-loss harvesting for you, further reducing the amount of work you need to do. Overall, fintech can make it much simpler and easier to manage your portfolio.

6. Prepare for the upcoming year

Finally, you should prepare your portfolio for the upcoming investment year. Start by evaluating its performance over the past twelve months. Did it beat expectations or fall short? Also, identify successful investments and the factors that helped them succeed.

Don’t ignore the losers, either. Understanding why certain investments didn’t fare well may help you avoid similar investments in the future. This isn’t to say no one makes the same mistake twice, but understanding the losers can reduce the chances of repeating your error.

When looking at the upcoming year, you’ll want to consider global economic indicators, as well as political and regulatory changes. How is inflation shaping up, and what actions will the Fed take to control it? These are just some examples of things to consider.

Most importantly, make sure your portfolio is set up so that it helps you meet your investment goals, that it’s properly balanced and that it aligns with your risk tolerance.

Bottom line

While inflation concerns remain in the latter months of 2023, preparing your portfolio for 2024 means following principles that have held true for many years. For instance, rebalance your portfolio if necessary and ensure it aligns with your investment goals. Consider optimizing your retirement contributions and reducing your tax liability. Use financial technology to better track your portfolio. Overall, though, you should ensure your portfolio is in line with your investment goals, which will make it easier for you to ultimately reach them.