Home Adviser Fund Update 7 Steps to Winterize Your Portfolio Published December 10, 2010 Is Your Portfolio Ready for the New Year? Holiday season is in full swing, winter is settling in, and thoughts are turning to the year ahead. But as you make your resolutions for the new year, use the time remaining this year to save yourself some money and set yourself up for a profitable 2011 by making a few key moves in your portfolio. In so doing, consider the tax implications of any changes to your holdings, and keep track of distributions and capital gains to come. Finally, make sure you’ve contributed the maximum amounts allowable to your 401(k), IRAA type of account in which funds can be saved and invested without being subject to tax until the account holder reaches retirement age. or other tax-deferred investment accounts. We’ve laid out seven steps below that all investors should consider before they head out for some holiday and New Year’s cheer. Step One: Re-balancing Your Portfolio. Throughout the course of the year, the performance of the various funds in your portfolio will not be uniform. For example, let’s assume you owned a three fund portfolio consisting of 70% in a broad market index, 20% in a short-term bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. fund and 10% in an international stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. fund at the beginning of the year. Through the end of November, that short-term bond holding is now probably closer to 19%, while the broad market position moved to over 71% and the international stock fund down under 10%. Re-balancing is simply the act of taking that extra 1%-plus out of the broad market index fund and putting it back into the short-term bond and international funds to adjust back to the original ratio, keeping with your long-term strategy. (Of course, some years there will be little need for rebalancing if your allocations remain mostly static throughout the year, as was the case in the example above.) While rebalancing is simple, psychologically and emotionally it is one of the most difficult tasks investors face since they are forced to sell their “winners” and add to the “losers” in their portfolio. This is where investors can benefit from the discipline and guidance of an independent investment manager – one who can make these adjustments without the emotional attachment to the particular winners and losers in your account. If you do plan on making allocation changes, take your losses in 2010, but wait to take gains until January 3, 2011. This allows you to use the losses on your 2010 tax return and will keep you from owing taxes on your gains until 2012. Step Two: Know Your Distribution Dates. Each year, you should check to see if any of the funds you own in a taxable account (or are considering purchasing) will be distributing capital gains before year-end. Both Fidelity and Vanguard list funds that are expected to make capital gains on their websites along with distribution calendars. (You can see a full distribution calendar for Fidelity in our November 24th Adviser Fund Update, and see the full Vanguard distribution calendar below). Step Three: Take The Loss. If you have a loss in a fund, it is occasionally appropriate to sell out of it to avoid a distribution, rather than have the distribution add to your tax bill. However, you’ll need to consider the size of the distribution, the size of your loss and what fees may be incurred in the sale before doing so. This is not always the best move. (Note: This does not apply to tax-deferred accounts.) Step Four: Avoid Buying The Distribution. If you do, you’ll end up paying taxes on the distribution as though you’d held the fund all year. So check carefully before you purchase a fund in a taxable account this month (no need to worry if the purchase is for a tax-deferred account). If it is poised to make a distribution, hold off on buying until after it does so (after the “record date”). You can buy a fund on its ex-dividend or reinvest date, when the share price drops to reflect the distribution. Step Five: Don’t Automatically Reinvest. It’s been our long-standing recommendation that you have your income and capital gains distributions sent to your money market fund and not reinvested in the fund that generated them. By doing this you have the option of reinvesting in the fund after it’s made its distribution or using your cash to add assets to other funds in your portfolio that may have underperformed that year – this can be a part of any re-balancing you deem necessary. Step Six: Take Advantage Of Tax-Deferred Accounts. It’s a well-known fact that 401(k)s, IRAs and other tax-deferred investment accounts are a great way to keep your assets growing tax-free, compounding their value year after year. For this reason it’s important to contribute the maximum amounts allowed to each account every year you can. Also, if you’re over 50, you are allowed to make ‘catch-up’ contributions to your 401(k) and IRA, above and beyond the normal limits. For 2010, you can put an extra $5,500 in your 401(k) and an extra $1,000 in an IRA. You have until April 15, 2011 to make your 2010 contributions, but why not do it now? Another aspect of retirement accounts to be aware of if you’re over 70-1/2 years old is your RMDA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules). (required minimum distributionA required minimum distribution is the amount of money that must be withdrawn each year from tax-deferred retirement accounts once the beneficiary reaches retirement age (72, according to IRS rules).). The RMD exists to make sure that savings in a retirement account are actually used for retirement and not just saved to pass on to heirs. The RMD is calculated (in most cases) by dividing the adjusted market value of your tax-deferred retirement account as of December 31 of the prior year by an applicable life expectancy factor taken from the IRS. If you fail to take your RMD from your retirement account, you will be assessed a penalty equal to 50% of the amount you should have withdrawn in addition to normal income taxes. With the market losses suffered in 2008, Congress gave investors some relief by passing a temporary measure – if you turned 70-1/2 in 2009, you have until December 21, 2010 to take the RMD. So if you took advantage of Congress’ relief measure in 2009 and didn’t take an RMD, make sure you do take it this year (and each year going forward) to avoid the penalty. Step Seven: Wrap-Up. While taxes are one of the last things anyone wants to think about during the cheer of the holiday season, an early effort can prevent bigger headaches and bills come April. That said, restructuring a portfolio and moving assets in an attempt to avoid distributions can be tricky, which is why we recommend you consult with a professional before doing so. At Adviser Investments, we have the experience and expertise to help guide our clients through the year-end tax maze, helping to make the holiday season a little less stressful. Vanguard Distribution Calendar Last time, we provided a full distribution calendar for Fidelity funds, this week, we have the full list of Vanguard funds expected to make income and/or capital gains distributions this month (to see the Fidelity calendar, follow this link: https://www.adviserinvestments.com/pdf/contentmgmt/112410.pdf). Funds that don’t appear on the list are not expected to make a distribution this year. Record Date: Wednesday, Dec. 15 Reinvest Date: Thursday, Dec. 16 Asset Allocation, Capital Opportunity, Capital Value, Energy, EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Income, Explorer, Explorer Value, Growth Equity, Health Care, International Growth, Managed Payout funds, MidCap Growth, Precious Metals & Mining, PRIMECAP, Social Index, Strategic SmallCap Equity, U.S. Growth, U.S. Value, Wellesley Income Record Date: Monday, Dec. 20 Reinvest Date: Tuesday, Dec. 21 Consumer Discretionary, Consumer Staples, DividendA cash payment to investors who own stock in the company. Appreciation, Emerging Markets Index, Energy Index, European Index, Extended Duration Treasury, Global ex-U.S. REIT, Health Care Index, High Dividend YieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price., Industrials, Information Technology, Materials, MegaCap 300, MegaCap 300 Growth, MegaCap 300 Value, Pacific Index, Russell 1000, Russell 1000 Growth, Russell 1000 Value, Tax-Managed International, Telecommunication Services, Total StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market, Total World Stock, Utilities, World ex-U.S., World ex-U.S. SmallCap Record Date: Monday, Dec. 20 Reinvest Date: Wednesday, Dec. 22 ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. shares of Consumer Discretionary, Consumer Staples, Dividend Appreciation, Emerging Markets, Energy Index, Europe Pacific, European, Extended Duration Treasury, Global ex-U.S. REIT, Health Care Index, High Dividend Yield, Industrials, Information Technology, Materials, MegaCap 300, MegaCap 300 Growth, MegaCap 300 Value, Pacific, Russell 1000, Russell 1000 Growth, Russell 1000 Value, Telecommunication Services, Total Stock Market, Total World Stock, Utilities, World ex-U.S., World ex-U.S. SmallCap Record Date: Wednesday, Dec. 22 Reinvest Date: Thursday, Dec. 23 500 Index, Extended Market, Financials, Growth Index, Intermediate-Term BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates., Intermediate-Term Corporate Bond, Intermediate-Term Government Bond, LargeCap Index, Long-Term Bond, Long-Term Corporate Bond, Long-Term Government Bond, MidCap Growth Index, MidCap Index, MidCap Value Index, Mortgage-Backed Securities, REIT Index, Russell 2000 Growth, Russell 2000 Index, Russell 2000 Value, Russell 3000, S&P 500 Growth, S&P 500 Value, S&P MidCap 400, S&P MidCap 400 Growth, S&P MidCap 400 Value, S&P SmallCap 600, S&P SmallCap 600 Growth, S&P SmallCap 600 Value, Short-Term Bond Index, Short-Term Corporate Bond Index, Short-Term Government Bond Index, SmallCap Growth, SmallCap Index, SmallCap Value, Total Bond Market, Value Index Record Date: Wednesday, Dec. 22 Reinvest Date: Monday, Dec. 27 ETF shares of Extended Market Index, Growth Index, Intermediate-Term Bond, Intermediate-Term Corporate Bond, Intermediate-Term Government Bond, LargeCap Index, Long-Term Bond, Long-Term Corporate Bond, Long-Term Government Bond, MidCap Growth Index, MidCap Index, MidCap Value Index, Mortgage-Backed Securities, REIT Index, Russell 2000 Growth Index, Russell 2000 Index, Russell 2000 Value Index, Russell 3000 Index, S&P 500, S&P 500 Growth, S&P 500 Value, S&P MidCap 400 Growth, S&P MidCap 400, S&P MidCap 400 Value, S&P SmallCap 600, S&P SmallCap 600 Growth, S&P SmallCap 600 Value, SmallCap Index, SmallCap Growth Index, SmallCap Value Index, Short-Term Bond, Short-Term Corporate Bond, Short-Term Government Bond, Total Bond Market, Value Index Record Date: Monday, Dec. 27 Reinvest Date: Tuesday, Dec. 28 Balanced Index, Convertible Securities, Developed Markets, Dividend Growth, Global Equity, Growth & Income, Inflation-Protected Securities, International Explorer, International Value, Market Neutral, Morgan Growth, PRIMECAP Core, Selected Value, Strategic Equity, Tax-Managed Balanced, Tax-Managed Capital Appreciation, Tax-Managed Growth & Income, Tax-Managed SmallCap, Total International, Wellington, Windsor, Windsor II Record Date: Wednesday, Dec 29 Reinvest Date: Thursday, Dec. 30 Diversified Equity, GNMA, Intermediate-Term Investment-Grade, Intermediate-Term Treasury, Long-Term Treasury, OH Long-Term, Short-Term Federal, Short-Term Investment-Grade, Short-Term Treasury, STAR, STAR LifeStrategy funds, Target Retirement funds About Adviser Investments Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index., fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., foundations and institutions meet their investment goals. Our minimum account size is $350,000. 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