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An Investment Strategy Checkup for the 4th Quarter

Don’t look now, but here comes the 4th quarter. The end of the year is a good time to take a look at whether you’re on track with your investment strategy. Don’t wait until the end of December. That could force you to make decisions or take actions too hastily.

First, review your financial goals. Have there been significant changes to your situation? Did you or your spouse get a new job, a raise, or even a bonus? Have other circumstances changed? Did little Susy get a full-ride scholarship to Yale? Is there a new child or grandchild that you want to include in your planning? Once you’ve reviewed your goals, take a look at your current investing strategy. Is there a way to save more, invest more, take advantage of different opportunities? If changes need to be made, determine the best time to make those changes, whether it’s now or next year.

Adjust Investments to Minimize Taxes

Once you have a clear understanding of your current situation and your goals, it’s time to plan for year-end. One big thing to consider is taxes. Now is a good time to review your statements and transactions to determine where you are for the year with capital gains. Do you currently have a gain, or a loss?

Are there investments or positions that no longer fit in with your investment strategy? Would selling them generate a loss, or a gain? Short-term or long-term? Compare these opportunities with the current loss or gain status you looked at earlier.

If you currently have capital gains for 2015, you may want to think about generating losses as well. That’s because when your losses in a taxable brokerage account exceed your realized capital gains, you can use those losses to offset all of your gains for that year, and even up to $3,000 of ordinary income. Also consider whether there are gains you will be generating in the upcoming years. You can carry over unused losses to subsequent years to offset future gains.

Portfolio rebalancing goes great with tax planning, which is why the 4th quarter is an excellent time to check your portfolio’s weights. If your current holdings are out of balance with your desired portfolio weights, now is a good time to make adjustments. To minimize tax consequences, you can offset gains against losses whenever possible. For example, if you have a $10,000 loss for the year, and you need to sell some winners to rebalance, you may be able to use that loss to avoid generating extra capital gains taxes. If you’re careful not to trigger the wash sale rule, you may even want to consider moving out of a losing fund or index and moving into a similar investment, perhaps one with lower expenses, a move that could both generate a loss and lower your overall investment expenses.

At the same time, you may want to wait until January to rebalance if your transactions will generate lots of gains. Doing so gives you the whole year to adjust your tax planning if necessary.

Finally, review your IRA options. While contributions can be made until April 15, 2016, now is still a good time to evaluate your situation. Will you qualify for a tax-deductible contribution to a traditional IRA? Will your income allow a contribution to a Roth IRA? Do you want to contribute all at once, or start making regular contributions now?

Whatever your circumstances, checking the health of your investment strategy before the crunch of the holidays is a smart move.

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