Despite December always following November, the year-end seems to catch many people by surprise. However, if properly planned, there are substantial financial optimizations to be gained. December 31 of any year is a major milestone for businesses as they try to optimize financials before the year end. But can you as an individual structure your finances to benefit too? The short answer is yes, so read on and find out how.
Businesses do whatever they can to legally reduce or defer taxes, and individuals also can minimize their taxes with some foresight. Here are some of the easy methods to consider.
- Increase your contributions to your pension and keren hishtalmut to ensure you are contributing the maximum (especially if you are self-employed). Contributions help to reduce your current tax liability and savings are invested in either tax-free or tax-deferred funds which can optimize the long term growth of your investments.
- You still have time to make charitable donations (to tax approved charities) in 2019. If you have taxable income, you can receive a reduction of 35% of the donation from your taxes owed. Speak to your accountant for more details.
- If you have retirement funds in the US, you need to ensure you are taking out at least your Required Minimum Distribution. But there are situations where you might want to take out more, so coordinate with your accountant to minimize any potential tax liability.
- Consider selling offsetting share positions (e.g. if you have paid taxes, sell shares that are priced at a loss, if you have sold shares at a gain, consider selling shares with gains) to limit your tax exposure this year.
Now that the potential tax benefit aspect of 2019 has been taken care of, let’s discuss what you should be thinking about regarding your investments in 2020.
Seeing as none of us are prophets and most people prefer not to overweight their investments, the end of the year is an excellent time to review your portfolio and various investments to see what needs to be optimized.
- Rebalancing – have certain asset classes gained more than others leaving your portfolio unbalanced? Think critically about your investment plan (or put one together if you don’t have one) and ensure your portfolio has not become misaligned over the year.
- Long term goals – investment strategies change according to your stage in life and any change in circumstances. Ensure that your investments still reflect your risk profile, age and overall financial situation.
In general, most stock investors in the Israeli and American stock markets have seen a very good year. This long term bull market (especially in the USA), which began after the recession lows of March 2009 is the longest bull market in American history. Which means that if you have been investing for the past 10 years you will have likely seen consistently good results, leading to that question that desperately needs a prophet to answer – how long will this last? Even if your general strategy is to passively invest in the market, the end of the year is always a good time to sit down and ensure that your portfolio is aligned correctly with your overall risk profile and time horizon for investing. Investing during bull markets always feels great and we easily forget the other side of the coin. After more than 10 years of gains, take a reality check and ensure you are prepared for all eventualities before you blindly stride forward with your current portfolio holdings.
I am certainly not advocating market timing. There are those who believe that they can use predictive tools to gauge the direction of the financial market, thereby profiting from their transactions or movements within asset classes. But even advocates of these strategies will admit that it is very difficult to time the market successfully in the long-term.
Instead, I recommend that you use this end of the year to rebalance and set yourself up for the coming year. Look at your risk level. If you are getting close to retirement, or the time when you will need to liquidate your investments, now is not the time to remain highly exposed, however tempting the large gains have been recently. Your timeframe will help you decide if you can literally afford to ride out a market fall, and wait for the correction.
Take this time to assess your portfolio and consider what ramifications potential losses will have on your short and long term financial plan. Adjust as necessary, but above all avoid the temptation to be greedy.
I feel I must mention Rav Chaim Zev Malinowitz, זצ”ל, the Rav of Beis Tefillah Yonah Avraham who passed away suddenly at the end of November. I was privileged to be exposed to his greatness in many ways (both in financial contexts and well beyond). Rav Malinowitz was a truly great man, who cared deeply for people and did whatever he could to help others at any opportunity, and all of Klal Yisrael are the poorer for his passing. May his memory be blessed.
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