Year-end financial planning can help investors can better position themselves for 2013, according to advocates who say December is a good time to take stock of your investments and clean house, if necessary.
“The end of the year is a reasonable time to review your overall investment portfolio and evaluate your existing asset allocation,” according to financial planning insights provided by federal regulators. “After reviewing your asset allocation, you might want to consider rebalancing your investment portfolio.”
Asset allocation refers to the mix of stocks, bonds, cash and alternatives, such as real estate and commodities, in an investor’s portfolio, according to the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority. Investors can reduce their overall risk by making sure their assets are adequately spread over a variety of investment products, a financial planning strategy known as diversification.
“By including asset categories whose investment returns move up and down under different market conditions, you might be able to better protect your overall investment portfolio from significant losses or price swings,” state FINRA and the SEC.
A year-end review may reveal that a portfolio fails to match an investor’s tolerance for risk or long-term financial goals, such as saving for retirement. Typically, some investments grow faster than others, resulting in a portfolio that’s concentrated in one asset class. The financial planning strategy of rebalancing allows investors to bring their portfolio back to the desired allocation mix, according to FINRA and the SEC.
Rebalancing can include selling over-weighted assets and reinvesting the proceeds in an under-weighted asset class, or channeling future investments into an under-weighted asset class, FINRA and the SEC state. Don’t forget to consider the tax consequences of any financial moves, including taxes on realized capital gains.
Diversification, risk and tax consequences are the top three financial planning considerations of high net worth investors, according to ongoing Millionaire Corner research into the investment preferences of affluent Americans.