Most importantly, staying the course amid volatility will lead to long term gains. “After a particularly tough year, many investors may be tired of the emotional roller coaster they have been on and feel compelled to get off, remaining on the sidelines,” said Megan Slatter, a wealth advisor at Crewe Advisors. “While understandable, it is arguably one of the worst financial decisions they could make for their portfolio’s future.”
Here are four specific techniques to keep in mind as 2023 gets underway.
Consider rebalancing your portfolio
Many investors know how much they intend to allocate towards stocks, bonds, or cash, but after so much turbulence in the market this past year, their actual asset allocation may not reflect how they aim to balance their portfolio. “After a year of so much volatility, portfolios could really be out of line from a long term asset allocation perspective,” explained Brian Price, Head of Investment Management for Commonwealth Financial Network. Price explained that for non-qualified accounts, rebalancing might make more sense in the new year, so the gains from the rebalancing will be counted in the 2023 tax year.
Slatter also emphasized that rebalancing your portfolio to reflect a traditionally safe distribution of assets will pay off in the long term, despite the fact that both stocks and bonds took a hit this past year. “2022 was the year when a traditional balanced portfolio was officially out of favour, with high inflation causing significant chaos in all asset classes through rising interest rates and rapidly increasing risk premiums,” explained Megan Slatter. “However, we anticipate this to be a temporary shift and expect traditional diversification’s tried and true investment strategy to be back in favor as markets return to more normal behaviors.”
Make tax efficient trades
One trading strategy that maximizes investing returns utilizes portfolio losses instead of gains. Tax loss harvesting is a technique in which investors sell a losing position to then reduce capital gains tax on investments that have done well. “This strategy can be used to offset gains this year or losses may be carried forward to offset long term capital gains in the future,” explained Carl Ludwigson, Managing Director at Bel Air Investment Advisors.
Tax efficiency can apply to funds as well as individual investments. “One of the most important things that investors can do this year is look at their non-qualified accounts, and see if there are any positions that are ripe for tax loss harvesting,” explained Price. If you have stocks ETFs, or mutual funds that are down, selling those positions at a loss can offset the capital gains tax from positions that have done well. As Ludwigson pointed out, the strategy can also be carried forward to offset future gains if your portfolio did not take gains this year. “If you have a fund that has not only been trading at a loss, but happens to be making a capital gains distribution, it makes sense to consider getting out of those funds before they pay the capital gains distributions, so you’re not subject to them for tax purposes,” said Price.
Bonds could be right for you
The high yields that marked 2022 make fixed income especially attractive for many investors this year. “For the first time in almost two decades, there is an opportunity for investors to generate income from their portfolios due to rising bond yields,” said Slatter. “If investors continue to search for yield, there is a compelling argument that extending duration and incorporating US Treasuries could provide a strong backbone for investors fixed income allocation within their overall portfolio allocation,” explained Slatter. She added that corporate-grade investment bonds could also be an attractive option to many investors.
Bonds should especially be considered for investors who are no longer working full time. “Bonds certainly merit consideration for clients who are either at or in retirement who are looking for fixed income, Price said. “I think good bonds are back in vogue again,” he added.
Prioritize value over growth
Especially when market conditions are murky, picking positions that prioritize solid fundamentals is especially important. “Within the equity space, I would encourage people to overweight value relative to growth,” recommends John Lynch, Chief Investment Officer for Comerica Wealth Management. While high growth stocks may have been attractive during the bull market, investors have now seen the flip side of prioritizing growth over value.
Lynch explained that looking for value over growth can be applied to mutual funds as well as individual stocks. “In a rising rate environment, I think the emphasis needs to be on quality,” Lynch said. While many funds are a combination of value and growth stocks, investors can use tools such as Morningstar Research’s list of value funds to see which funds skew more towards value over growth.
Play the long game
While uncertain market conditions may be alarming, the biggest mistakes investors can make are when they’re making moves in their portfolio out of fear. With market volatility likely to continue into 2023 and a potential recession looming, investors should brace themselves for a rocky market but be committed to steady decision making. “I think perhaps most important is for investors to have a patient mindset,” says Lynch.
If investors wait for the market to improve before getting back into it, they likely will have already missed much of the rebound of the bull market. “This is a good time to remind investors how critical it is to remain invested during volatile times, and not allowing emotional decisions to dictate investment decisions, to do so, could prove devastating for long-term financial success,” said Slatter.
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