No matter if your stocks are held in tax-efficient retirement accounts or traditional brokerage accounts, taxes will inevitably have an impact on their returns. Therefore, it’s essential that tax management be incorporated into your investing strategy in order to achieve optimal investment results.
Harvesting losses, for instance, can help offset capital gains and enhance after-tax net returns.
1. Review Your Asset Allocation
Asset allocation is key to creating an effective investment strategy, and involves diversifying your investments among various asset classes such as stocks, bonds and cash or cash equivalents. The idea behind asset allocation is to protect investments against risky securities while increasing long-term returns.
Your investment goals, personal financial situation and risk tolerance all play an integral part in determining your desired asset allocation. A retirement account with an extended time horizon might allow for more aggressive investing in growth-oriented assets; conversely a down payment fund for purchasing property could require more conservative asset allocation choices.
Rebalancing your portfolio regularly ensures it remains aligned with your goals and risk tolerance, and allows you to offset gains with capital losses to help lower tax costs. Reviewing asset allocation early in the year is especially advantageous for taxable investors as this gives them time to implement any necessary adjustments before facing higher tax rates in 2019.
2. Rebalance Your Portfolio
Rebalancing your portfolio periodically is an integral component of successful investment strategy. Over time, as asset classes perform differently and diversification slips away, your desired allocation may become out-of-whack with reality. Rebalancing requires selling certain assets to purchase others so as to restore balance to your portfolio; capital gains taxes may apply here but working with a financial professional will help minimize these costs.
Rebalancing a portfolio can be done easily by taking advantage of distributions from tax-advantaged accounts to reduce appreciated positions while purchasing underweighted assets. For those with taxable accounts, redirecting new contributions and reinvested dividends towards underweighted asset categories is another effective method to rebalance without having to sell any appreciated assets.
Financial experts may advise rebalancing on a set schedule or according to what their investments dictate; either way, regular rebalancing helps lower market exposure risks while potentially improving future after-tax returns.
3. Reassess Your Tax Situation
One of the largest factors limiting investment gains is taxes. There are various legal strategies available to you for lowering, deferring or eliminating them to keep more of your earnings working for you.
One way you could reduce your tax burden is through periodic reassessments of your property value. As local governments conduct these assessments, market values may change and this helps stabilize your tax bill over time.
Capital gains should be offset through “tax loss harvesting.” This practice allows us to sell appreciated assets at a gain while offsetting their capital gain with losses from other investments.
When it comes to managing tax costs, your choice of account can make an enormous difference in managing them. Moving positions between tax-deferred accounts can significantly decrease exposure to taxes; that’s why it is crucial that you regularly evaluate its suitability.
4. Take Stock of Your Investment Strategy
At first glance, investing can yield substantial returns over time for an astute investor. But it’s important to remember that market returns and the success of any given investment strategy depend more on factors outside political party influence than they do on how one or the other policy platform governs them.
At its core, the key to keeping ahead of tax changes lies in developing an investing plan tailored specifically to your needs. This begins by answering some key questions such as your investment horizon and risk tolerance as well as potential returns you can expect from investments.
Investors seeking a conservative strategy might prefer a portfolio with more bonds than stocks, while those comfortable with greater risk should incorporate growth investing. Dollar cost averaging could also provide regular investments over time.