THE END OF THIS YEAR IS COMING – Where Should Inverstors FOCUS?

It may be hard to believe but the year is flying by and the end of the year will be here sooner than you realize. 2022 has been a challenging one for most investors, but the challenge has created opportunities for investors to be proactive and put themselves in position for a rewarding 2023.

This year has been unusual as both risk assets (equities) and safer assets (bonds) have declined. Investors should use this time to rethink exactly why they are investing and what their investment goals are. Is it to grow assets to fund their lifestyle in the future? Is it for near-term liquidity? Is it for future generations, philanthropy, to fund a business venture or some combination of these? Each of these goals requires a well-thought-out, long-term, diversified asset allocation so investors can weather market volatility. Investors should confirm that their current investment plan is aligned with their goals.

Once a plan has been agreed upon, investors should check that their portfolio’s current asset allocation is in line with the plan. Market volatility may have shifted weightings such that they no longer reflect the proper allocation to each asset class and may need to be rebalanced. Studies have shown that rebalancing tends to improve risk-adjusted returns over time. Working with a financial advisor can help investors navigate volatility and stick with their plan. At First Long Island Investors we review each client’s asset allocation on a quarterly basis.

With the market’s decline thus far this year there is probably an opportunity for investors to harvest unrealized losses, which can be used to offset realized capital gains. The result is that investors only pay taxes on their net profit, thereby reducing their tax bill. Investors should analyze their portfolio and determine where there are appropriate losses to take, being mindful of the wash sale rule, which can invalidate the realized loss. Should an investor still like the company’s prospects, shares can be repurchased after 30 days. Please consult a tax expert for advice. Typically, tax loss harvesting is done towards the end of the year, but given this year’s decline, investors should consider doing so sooner, in order to take action before others have the same idea.

One thing investors should not do is panic sell or get more aggressive to make up for losses. Investors need to look out long-term and stick with their investment plan. They should realize that downturns are a part of investing and have proven in the past to be temporary. While at times it may feel like prices will never stop going down, market history has shown that well diversified portfolios can rebound and become profitable. It’s important to remember that investing is a marathon, not a sprint.

One final suggestion as the end of the year approaches is to be charitable. Besides being altruistic you may get a tax benefit from your donations. I will provide a deeper dive into charitable giving in my next column.