If you’re writing up your holiday to-do list, here’s one thing you can’t afford to leave off — reviewing your portfolio.
According to a 2015 Bankrate Money Pulse Survey, only about a quarter of Americans check their investment and retirement accounts more often than once a month. If you’re part of the majority that doesn’t track your investments regularly, you could be veering off course without realizing it.
As 2016 draws to a close, it’s a good time for a little financial fine-tuning. Here’s what you should be doing now to get your portfolio ready for the year ahead.
[See: 7 of the Best ETFs to Own in 2017.]
Start with investment fees. If you’re paying a healthy amount in fees, you need to consider what kind of value you’re getting, says Adam Torres, a certified financial planner and CEO of Century City Wealth Management in Beverly Hills, California.
Examine the management fee as well as the expense ratio of the investments in your portfolio and then compare it to the investment’s track record. Torres offers an example of an international mutual fund with an expense ratio of 1.5 percent.
“That may seem like a lot, but it’s not if the mutual fund manager is far outperforming his benchmark in excess of the additional basis points,” Torres says. “You might be able to get a cheaper fund, but at what price related to the return?”
Mike Falco, an independent advisor and owner of Falco Wealth Management in Berwyn, Pennsylvania, says investors also need to think about the deductibility of the fees they’re paying.
“This time of year, you want to look at your year-end statement and make sure you know the total amount paid in investment fees,” Falco says, since they’re considered investment expenses and may be deductible if you itemize.
Leverage the power of tax-loss harvesting. Harvesting investment losses is a wise move if you’re concerned about offsetting capital gains at tax time and it may be particularly important this year.
“With a potential reduction in income tax rates coming, now’s the time to do tax-loss harvesting to get the most bang for your buck,” says Josh Jalinski, president of Jalinski Advisory Group in Toms River, New Jersey.
Falco advises investors to start by thinking about the individual holdings in their taxable investment accounts and the cost basis of each one. Determining whether you have a capital loss or a capital gain is as simple as subtracting the cost basis from the current value. From there, you can decide which assets to sell.
“If you have a large gain in some areas and losses in others, match them up and sell the ones with big gains and big losses,” Falco says. “Just keep in mind that the IRS will only allow a net loss of $3,000 per year on a tax return.”
Dan McElwee, president of Ventura Wealth Management in Ewing, New Jersey, cautions investors to study all the angles before pulling the trigger on tax-loss harvesting.
“Before selling, an investor should question why the investment is down,” McElwee says. “Are the fundamental and technical reasons they made the purchase still in place?”
If the reasoning behind the purchase of a particular investment no longer holds, the time may be ripe to realize the loss to offset gains, McElwee says. Harvesting for the sake of harvesting, on the other hand, isn’t a sound strategy.
[Read: Boost Your Portfolio Before the New Year.]
Rebalance appropriately. Despite the post-election boom in stocks, investors shouldn’t rule out the possibility of a downturn at some point, says Sean O’Hara, president of Pacer ETFs in Paoli, Pennsylvania.
“Many investors don’t factor downside protection into their portfolio,” O’Hara says.
When the market is riding a sustained high, it’s easy to forget about the possibility of an eventual correction. Without some insulation against volatility, your portfolio may not be as diversified as you think.
O’Hara says investors need exposure to investments that can outperform when the market takes a dive. He suggests trend-following exchange-traded funds, as well as dividends, which can provide income during a market downturn.
Jalinski says investors should not chase last year’s winners, encouraging them to seek out hidden values instead. He also recommends thinking about what investments may do well under a Trump presidency, such as U.S. stocks, infrastructure and energy.
“We’re in an optimism trade; therefore, bonds and emerging markets may struggle,” Jalinski says.
Tend your tax-advantaged accounts. Maximizing contributions to tax-advantaged accounts, such as a 401(k), individual retirement account or health savings account, takes on a new sense of urgency this year with talk of tax policy changes making the rounds.
“Investors in high income brackets may want to defer more income in 2016,” McElwee says, which could allow them to withdraw those funds at lower rates in the future, assuming that marginal income tax rates are reduced.
Beyond the amount you’re contributing, it’s also essential to think about what you’re investing in. Jeff Weeks, founding principal of Austin, Texas-based ATX Portfolio Advisors, says that when it comes to tax-advantaged versus taxable accounts, asset location is just as important as the allocation.
“By positioning the most tax inefficient investments in retirement accounts, such as taxable bonds and REITs, investors can leverage the tax deferral more effectively,” Weeks says.
More efficient investments, like equity index funds, can be in either a taxable or retirement account. These can be less painful tax-wise, due to their low turnover and favorable tax treatment of dividends.
While reviewing your portfolio, take the time to evaluate which investments you’re holding in both your retirement and taxable accounts to make sure you’re investing as efficiently as possible from a tax perspective.
Formulate your larger financial plan. Kei Sasaki, chief regional investment officer with Wells Fargo Private Bank in New York City, says investors must think beyond near-term market projections when shaping their investment strategy.
“Investors should begin by understanding their unique goals and objectives, and tolerance for risk, as well as other considerations like time horizon, liquidity and tax sensitivities,” Sasaki says.
Once you’ve developed a personalized financial plan, he says, you can build an “all weather” diversified portfolio that aligns with your goals. That doesn’t mean, however, that you can take a completely hands-off approach going forward.
“I have many people come to see me who haven’t looked at their portfolio in years,” Falco says. “They assume someone else is doing it for them and that’s not always the case.”
He says staying in touch with your broker or advisor and being aware of how life changes can affect your investment choices are vital.
[Read: 5 Pit Stops for Better Retirement Planning.]
“The No. 1 thing I tell my clients is don’t forget about your portfolio,” Falco says.
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Prep Your Portfolio for the New Year originally appeared on usnews.com
