Year-end portfolio moves to make even with this week's market rout
As investors weather more volatility after Tuesday's799 point drop for the Dow Jones Industrial Average, financial experts have largely stuck to one refrain: Welcome to the new normal.
Concerns over tariffs and what the Federal Reserve will do will likely keep market volatility elevated, according to J.J. Kinahan, chief market strategist and managing director at TD Ameritrade.
"But volatility is only elevated compared to the last couple of years," Kinahan said. "It's actually normal on a historical level."
That means days like Tuesday and now Thursday, with triple-digit drops, should be considered in a broader context rather than one isolated moment.
"A 600-point move [in the Dow Jones Industrial Average] is a 2 percent move. It's not a 10 percent move anymore," Lisa Shalett, head of investment and portfolio strategy at Morgan Stanley Wealth Management, said. "It's all about re-calibrating, 'What does a triple-digit move mean?'"
As we come up on the end of the year, there are some things you can do to make sure your investments are prepared to weather the highs and lows 2019 may bring.
Reset your expectations
"The first thing you should do before saying, 'This is a buying opportunity,' is take stock of your investments and look where you got in," Kinahan said.
Revisit your goals, time frame and what you own. Then remember: you don't necessarily have to change anything, he said.
"Big market moves give you an alert, like changing your batteries when you change your clocks," Kinahan said. "Reconsider what you're doing and the path you want to be on."
To keep volatility in context, it also helps to expand your memory bank, Shalett said.show chapters
"This has been a very long cycle, and a decade is a long time," Shalett said. "A decade can make us intellectually lazy about a lot of things. And one of the things it has made us intellectually lazy about is the VIX."
That's the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which is a representation of the market's expectation of volatility over the next 30 days. The VIX is usually somewhere between 15 and 20, not 10 to 13, Shalett said.
Volatility will normalize as fiscal and monetary policy, economic growth and price-earnings ratios also become more regular.
"This is a lot more normal," Shalett said. "It's just abnormal relative to the last decade."
Fine-tune your allocations
Morgan Stanley's target for the S&P 500 next year is 2,750, which is right around where the index is now.
That means flat or low single-digit returns are to be expected, Shalett said.
Investors would be wise to steer away from vulnerable areas including technology, consumer discretionary and communication services, according to Shalett.
Areas of the market with more promise include energy, consumer staples, health care and REITs, she said.
Now is a great time to take a look at your portfolio and rebalance, said financial advisor Paul Pagnato, CEO of PagnatoKarp.
Take a look at all of your holdings across asset classes – stocks, bonds, cash and others – and assess whether you need to adjust your allocations, Pagnato said.
When it comes to rebalancing, be sure you don't do it too much or too little. Consider adjusting your investments anywhere from once a quarter to once a year, depending on your investment profile and what is going on in the markets, according to Pagnato.
"The maximum I would do it would be once a quarter," Pagnato said. "If you start doing it more than every quarter, it can start to become tax inefficient."
Keep tax-friendly strategies in mind
Pay attention to tax-smart strategies that can help your portfolio at the end of the year.
If you own a stock that has suffered losses, such as Ford, you can use that to offset other gains in your portfolio, Pagnato said.
By tax-loss harvesting, you can sell the stock and put that money in cash or a like security, such as Tesla. Then after the first of the year, you can buy the stock back.
"You need to wait at least 31 days" before buying the security again, Pagnato said. "Otherwise, you trigger something called a wash sale, which would just disallow the tax loss."
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Alternatively, you can deduct up to $3,000 of investment losses against ordinary income in a given tax year. That limit is $1,500 each if you are married and filing separately.
You can also choose to give away up to $15,000 to parties including family members without having to pay gift taxes as long as you do it by Dec. 31. Then, you can choose to tack on an additional $15,000 in January that would count toward the following year's limits, Pagnato said.
Rather than giving that money in cash, you can give securities directly from your portfolio.
Factor in additional income
The end of the year may mean you see extra income from a bonus or a raise.
If you can put that income off until January, that will push that money off to the following tax year.
Also be sure to take that income boost as an opportunity to maximize your pretax contributions to 401(k) or individual retirement accounts, Pagnato said.