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5 portfolio moves to consider before year-end

Christine Benz  |  17 Dec 2019Text size  Decrease  Increase  |  
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Very strong years for the market, as 2019 has been so far, tend to encourage a bit of complacency among investors. With stocks marching steadily (or pretty steadily, anyway) upward, it's tempting to peek at your enlarged balance and leave well enough alone.

But no matter the market environment, I'm a big believer in conducting periodic portfolio reviews – at least once annually but no more than quarterly – to make sure your portfolio and your plan are on track. To help stay on task as you do so, I like the idea of using an investment policy statement to guide the review and even to spell out how often you'll conduct them. 

If undertaking a year-end portfolio review is on your to-do list as the year winds down, here are five adjustments to consider making.

1) Assess your equity allocation

Given that the market has performed exceptionally well so far in 2019, your portfolio's equity allocation is one of the key items to have on your dashboard as you review your holdings. If you're getting close to retirement and haven't checked your asset allocation recently, it may well be time to lighten up on stocks.

After all, a portfolio that was 60 per cent equity/40 per cent bonds would contain more than 80 per cent in stocks today. And as retirement approaches, most of us want to take risk off the table rather than add to it. Retirees who encounter a bear market early on in retirement but don't have adequate liquid reserves to drew upon for living expenses may permanently impair their portfolios' ability to recover and last.

At the other end of the age spectrum, investors who have many years until retirement may want to stand pat with very high equity weightings. After all, their risk capacity – the likelihood that they'd need to crack into their retirement assets to supply cash for living expenses – is extremely high. 

Start the process of reviewing your asset allocation with Morningstar's X-Ray tool in Portfolio Manager. If you don't have a portfolio saved, Instant X-Ray offers the same basic functionality and is a quick way to save your portfolio on the site for future monitoring. Compare your portfolio's current asset allocation to your targets; if you don't have targets, a sturdy target date series, such as Vanguard's or BlackRock's LifePath Index series can serve as a useful starting point.

2) Assess your liquid reserves – quantity and quality 

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You might assume that checking your asset allocation begins and ends with a review of your long-term holdings. But cash holdings belong on your portfolio check-up dashboard, too. If you're still earning an income, holding three to six months' of living expenses in liquid reserves is a good starting target.

Meanwhile, higher-income workers and those with specialised career paths have reason to shoot for a higher cash cushion, such as a year's worth of expenditures, because it can take longer to replace those jobs if they lose them. For people who are already retired, I like the idea of maintaining a cash cushion equal to one to two years' worth of portfolio withdrawals, to help guard against selling longer-term assets in volatile times. (That's the basis of the Bucket Approach to retirement portfolio management.)

In addition to checking up on the amount of liquid reserves that you hold, also check up on where you're holding that money. Online savings accounts are usually among the highest-yielding FDIC-insured instruments, but money market mutual funds, which aren't FDIC-insured, offer decent and improving yields and the convenience of having your cash live side by side with your investment assets. Yields on brokerage sweep accounts, which offer convenience for traders who like to keep cash at the ready, are often stingy on the yield front.   

3) Scout around for tax-saving opportunities 

As 2019 winds down, you'd have to be an awfully unlucky investor to have sizable losses among your equity holdings. But if you're an individual-stock investor, you may be able to identify some positions that are trading below your purchase price. You have the opportunity to cut those losing positions from your taxable account; you can then use the loss (the difference between your purchase price, or cost basis, and your sale price) to offset capital gains elsewhere in your portfolio, such as from mutual fund capital gains distributions – ouch). If your losses exceed your gains, you can use them to offset ordinary income of up to $3000, and those losses can also be carried forward into future years. 

Investors who are in the 0 per cent tax bracket for capital gains might consider the opposite strategy – pre-emptively selling their winners, also called "tax-gain harvesting". In so doing, they won't owe any taxes on the appreciation, provided their taxable income, including the capital gain, doesn't exceed the threshold for 0 per cent capital gains.

4) Revisit your retirement plan contributions

Many investors set their retirement-plan contribution rates at work and don't adjust them as the years go by. Meanwhile, their salaries drift higher and so do the tax contribution limits. Even if you can't make the maximum allowable contribution, see if your budget allows at least a small nudge up, as those automatic contributions are one of the most painless ways to increase your savings. (And increasing your savings, of course, is one of the best ways to take control when the market is behaving erratically.) 

5) Hone your charitable giving strategy 

Higher standard deduction amounts plus the cap on state and local tax deductions (including property tax) mean that many fewer taxpayers benefit from itemising their deductions than in the past. As a result, they won't necessarily receive a tax benefit from making charitable contributions. 

In addition, if you have problem holdings in your taxable account, those can be prime candidates for charitable giving – either directly, or via a donor-advised fund. By gifting those shares for charity, you can get the problematic position out of your portfolio, you may be able to clear the standard deduction threshold, and you'll deliver a benefit to a charity you believe in. 


is Morningstar's director of personal finance.

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