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Investing Specialists

6 Portfolio To-Dos for the Fourth Quarter

Check some of these tasks off your list before the going gets hectic.

Holiday lights began encroaching on the Halloween candy in the stores a few weeks ago. And thanks to Kmart, Thanksgiving morning--not that night or the day after--will now mark the official start of the holiday shopping season. Sigh.

But as much as retailers might be trying to incite a premature holiday season, the next few weeks are a relatively tranquil period--one that's optimal for crossing a lot of financial to-dos off your list. Sure, you can wait until year-end to contemplate making additional 401(k) contributions or scouting around for tax losses. But by crowding in those tasks with the holiday season, you risk doing a slipshod job--or not doing them at all.

Here's a short list of portfolio to-dos to check off between now and year-end--or even sooner. 

1) See if rebalancing is in order.
Let's be honest: In most years, rebalancing isn't a must-do. Failing to trim your 68% equity weighting back to your target of 65% is not going to stand between you and a comfy retirement. Yet rebalancing becomes more important in a market like the current one, in which stocks have soared and bonds have been relatively weak. A portfolio split 50/50 between total stock and bond market index funds at the beginning of this year would now be 56% stock/44% bond, and a portfolio that hadn't been rebalanced for five years would be even more out of whack--62% stock/38% bond. 

Given the stock market's amazing run, it may be tempting to say, as they do at Mardi Gras, "Laissez les bons temps rouler." Bond yields are shrimpy, interest rates could trend up, and equity market valuations, while not low, don't appear to be in bubble territory. And at an emotional level, winning feels good, so why trim stocks?

But restoring your portfolio's equity allocation back to its target level will reduce its volatility level going forward. This article discusses why you should hold your nose and rebalance some of your equity allocation back into bonds, even if the prospects for fixed income don't look especially bright. This one suggests some specific guidance on rebalancing, including identifying areas of your equity portfolio that could be in particular need of trimming because they look more richly valued at this time.  

2) Tee up your RMDs.
If you're retired and taking required minimum distributions from your tax-deferred portfolio because you're age 70 1/2, pulling those distributions from areas that look lofty is an excellent way to restore balance (see above). As long as you take the correct RMD amount from all of your accounts of a given type (for example, traditional IRAs), it's OK to be surgical about where you go for cash. Savvy retirees knit RMD season in with portfolio management, culling their distributions from positions that are larger than they should be, overvalued, or unattractive on a bottom-up basis. This article discusses some tips to bear in mind now that RMD season is upon us.

3) Maximize retirement contributions.
In a similar vein, accumulators can help restore order to their imbalanced portfolios by adding new monies to the areas that need topping up. If they haven't yet made the maximum allowable contributions to their company retirement plans (such as 401(k)s) and IRAs this year, they can kill two birds with one stone by steering new monies to the parts of their portfolio that haven't appreciated as much as their equity holdings. For 2013, 401(k)/403(b)/457 contribution limits are getting a slight bump up--to $17,500 for those younger than 50 and $23,000 for people over 50. IRA contribution limits for 2013 are at $5,500 for people under 50 and $6,500 for those over 50. If you have a very large portfolio, new retirement account contributions alone aren't going to be enough to restore balance, but they're a start. Year-end is your deadline for company retirement-plan contributions, whereas April 15 is the IRA deadline.

4) Be on high alert for year-end capital gains distributions. 
'Tis almost the season for mutual funds to begin making capital gains distributions, and savvy investors should be on the lookout for some hefty ones. Not only are stocks way up, but many actively managed funds have experienced asset outflows, which means that impending capital gains distributions will be spread out over a smaller shareholder base. Don't go out of your way to sell something you'd otherwise like to hang on to just because of an impending capital gain; after all, you could end up having to pay capital gains tax anyway when you sell your shares. But if you had planned to lighten up on a position anyway, a fund's impending distribution should provide additional incentive to get a move on. 

Fund companies are beginning to make year-end tax information available, including Fidelity, Vanguard, T. Rowe Price, and American Funds. And, of course, it goes without saying that you should avoid "buying the distribution," purchasing a new fund just before it makes a capital gains payment.

5) Scout around for tax-loss sale candidates.
A rising market makes it more difficult to find positions that you're holding at a loss, but it also makes them more valuable because you can use them to offset capital gains from winning positions or, if your realized capital gains are all exhausted, ordinary income. Emerging-markets funds have annualized losses during the past five years and could be ripe for the selling if you're holding them at a loss. Many bond funds are also in losing territory during the past three years and so are the investors in them, based on our latest investor-return data

You can even rebuy another similar investment right away if you'd like to maintain exposure to that area; just be sure to choose a different type to avoid negating your tax loss with the Internal Revenue Service's rule on wash sales. Swapping an active emerging-markets fund for a passive vehicle should be OK; swapping an emerging-markets index fund for an emerging-markets exchange-traded fund probably isn't. 

6) Sell your winners.
Selling winners prematurely would seem to run counter to the conventional wisdom of tax planning: defer defer defer. But for people in the 15% tax bracket and below--that's singles earning less than $36,250 and married couples filing jointly earning less than $72,500--selling highly appreciated securities preemptively looks like a pretty good strategy. Because there's no long-term capital gains tax on such individuals, they can sell their winners without tax repercussions, then rebuy them immediately. (There's no wash-sale rule in this situation.) The advantage of doing so is that they'd reset their cost basis, so if they want to sell at a future date and are liable for capital gains taxes at that time, their tax burden will be lower. 

See More Articles by Christine Benz