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Portfolio Housekeeping Moves to Make in December

This is the month to lower your 2017 tax burden and position your portfolio for the new year.

There’s one more month left in the year, and investors should make the most of it to lower their tax burden and position their portfolios for January. December traditionally is when investors review their portfolio’s allocations for the year.

Some investors use this time to close outstanding positions and lock in profits, thereby avoiding the potential price swings from the typically lower trading volume at year’s end. Others sell losing positions to offset winners for the tax benefits, or donate stock to charity as yet another way to avoid capital gains. Financial experts say December is also a good time to start researching new investment opportunities.

This is when a profitable year becomes a taxing situation.

Most of December’s portfolio housekeeping moves involve lowering potential tax burdens. Investors with losing investments this year can deduct up to $3,000 of those losses to cut their taxable income, although that may be difficult to do because so many investments were profitable. “There are going to be a lot of capital gains this year. We invest in a diversified portfolio around the world, and everything was up in the third quarter.

Year-to-date, the Standard & Poor’s 500 stock index is up 16 percent, the Nasdaq 28 percent and the Dow Jones industrial average 19 percent. International equities and emerging markets also gained, with many outperforming domestic indexes this year.

Although investors will have to hunt for losses in 2017, a few names, such as General Electric Co. (ticker: GE) and retailer Macy’s (M), saw their stocks decline. There are about 100 or so S&P 500 names that are down this year, says Kate Magrath, vice president of iShares US product management and strategy at BlackRock in San Francisco. The telecommunications and energy sectors are also lower, so investors may find ways to relieve their tax burdens with holdings from those sectors, says Brandon Thomas, co-founder and chief investment officer of Envestnet PMC in Chicago

Losses aren’t the only things to consider. People with holdings in taxable accounts should beware of any investments that may distribute capital gains, Magrath says. Many funds will distribute taxable gains to shareholders, even if those shareholders weren’t invested in the fund when the gain was incurred. So you may want to consider using tax-efficient exchange-traded funds to replace any funds with higher tax burdens.

December is also the time to review your 401(k) contributions and make any changes. Contributions to qualified accounts like 401(k)s can help reduce taxes but must be made by Dec. 31. The same Dec. 31 deadline applies to other qualified savings vehicles, like 529 plans for people with children who might attend college, says James Hickey, chief investment strategist at HD Vest in Irving, Texas.

Rebalancing a portfolio helps position it for the new year.

Most associate the end of the year with rebalancing a portfolio, or at least considering investment options for 2018. Because so many markets rallied this year, your portfolio’s asset allocations may be out of whack.

The widespread gains may even make it difficult to rebalance, but if your portfolio has any laggards, take some profits from your winners and use them to shore up the leaner investments. If your U.S. allocation should be 20 percent and say that allocation has risen to 25 percent, maybe you have some other asset like bonds that underperformed. You can take a little bit of profit and redeploy it. That’s easier said than done. Traditionally you want to buy low and sell high, but people have a hard time with that.

Analysts see growth potential for these investment categories.

Thomas expects international and emerging markets to continue doing well in 2018. Small-cap stocks and value stocks of all sizes, which lagged the broader market in 2017, could also do well. It was unusual for both categories to underperform the broader market because historically small caps and value stocks do very well, he says. Because he expects the investment cycle to change next year and favor both small-cap and value stocks, Thomas is advising clients to rebalance their asset allocations more toward these categories.

Hickey also expects small caps to rebound next year, along with mid-cap stocks, and his outlook for 2018 calls for continued growth domestically and globally. “We won’t have the (same) growth we had this year because not every year will be as good,” he says. “We’re looking for a six to 10 percent return for U.S. equities.”

Although he thinks value stocks might do well next year, he says investors may have a hard time finding them because few bargains remain after stock prices climbed in 2017.

BlackRock’s Magrath sees more possibilities with international stocks. With corporate earnings overall on a global upswing and solid economic growth expected to continue into 2018, BlackRock recommends adding to more global holdings, especially considering that most investors tend to be overweight in domestic stocks.

To take advantage of global growth, BlackRock overweights emerging markets, even after the category’s sharp gains in 2017. “We have a positive outlook for the sector,” Magrath says. “The better global growth, weaker dollar and strong reforms across the region help.”


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