This is the time of year when investors should be reviewing their portfolios, both non-retirement and retirement plan investment balances, and rebalancing their asset allocation based on the performance of the past year.
For example, with the Dow Jones Industrial average increasing 11% this year through December 29, investors with large-cap exposure should now consider paring back this asset class and reinvesting sales proceeds in another asset class that did not fare as well.
Review and Rebalance
Similarly, investors in a Russell 3000 sector experienced a 13% valuation gain year-to-date in 2010; reviewing a diversified portfolio's exposure to growth and value styles, mid cap, international emerging markets, corporate and government bonds, and cash is a very appropriate undertaking with the advent of the New Year.
Rebalancing the portfolio should always be based on investors' risk tolerance; desired rate of return (measured by income and yield); their investment timeline, for example, to fund college expenditures that commence in six years; and their current and expected cash-flow needs. As a general rule, if they have a financial goal to fund in five years or less, they should avoid investing in equities.
To Do List: Before Year-End and in the New Year
Recognizing gains and redeploying the proceeds to rebalance investors' diversified portfolios should be done by Dec. 31, 2010, along with recognizing losses as well, to offset taxable gains.
Where no realized losses exist, consider selling appreciated positions early in January 2011, and defer the tax due on the gain until April 15, 2012—the due date for 2011 income tax returns. Remember the 15% long term federal capital gain tax rate continues into 2011 and 2012.