Year-End Financial Decisions and New Year's Resolutions

As the Holidays approach and the New Year comes upon us, I hope you enjoy the festivities with moderation and prudence.  At this time of year, there are so many distractions, which could hinder you from making sound financial decisions that can benefit you tremendously this year and next.  With only two weeks left in the year, now is a good time to sit by the fire, in your favorite chair, and make a resolution that really means something for you and your family: resolve to close out 2008 in a fiscally prudent way, and vow to make 2009 the year you take control of your financial well-being.

There is very little you can do after December 31st to reduce your 2008 taxes.  Careful planning can help you direct the flow of your money away from the IRS, and towards you, and your heirs.  So review your tax issues now to see what you can do about them.  Everyone should pay Uncle Sam only his or her fair share... and not a penny more.

You have worked hard for your money, so let us examine some year-end activities that could help you reduce your tax bill.

Check the status of taxable gains and losses in your portfolio
Review your portfolio to see if you have any realized gains from stocks, bonds, or funds that you have sold at a profit any time this year.  If so, you might want to sell some under-performing positions and take some losses to offset those gains.  All gains can be equalized against losses and after all gains are depleted, an additional $3000 can be credited against ordinary income.  Any additional losses can be carried forward over your lifetime to be used to even out any future gains and again against ordinary income annually.  Share your losses with Uncle Sam; it is to your benefit.

It can get very tricky to segregate your profits and losses by short-term and long-term components, as required on your tax return.  Nevertheless, it is certainly something to consider.  You'll want to pay maximum attention when assessing your portfolio and deciding which positions to sell and which to keep.  Contact your accountant or financial advisor to assist in this process.

Sell Losers, but watch out for the "Wash Sales" Rules

Ever since the start of the stock market downturn last year many people find they are holding investments that they really like from a fundamental standpoint, but are now worth a lot less than what was initially paid for them.  Under the "wash sale" rules, you can sell stock for a loss for income tax purposes before year end, but you cannot buy it back for a period of 30-days before or after the loss-sale date, or else the loss cannot be claimed.

This rule is designed to prevent you from selling an under performing position, just to claim a loss.  If you buy that same issue back within a 30-day period of time to retain ownership, the tax write off is disallowed.  Note that the rule applies to repurchases both 30-days before or after the sale date.  The IRS does not allow you to retain your economic position in your stock and simultaneously get yourself a tax deduction.

A suggestion to those who may panic at the thought of missing out on a potential upside movement from being out of a particular equity position for a 30 day period, would be to purchase the appropriate Exchange Traded Index Fund (ETF).  There are ETF"S for most every sector, including an ETF for the sector that your stock is represented.  Go to Ishares.com, or any number of financial websites, type in your stock symbol, and it will list which ETF and how much weighting your stock represents to the overall weighting of that index.  If you recall the old adage that "birds of a feather, stick together", translates in stock market parlance to generally mean, that stocks within the same sector move somewhat in concert with each other.  Alternatively, if you own a mutual fund, finding the corresponding ETF is an even easier process.

Switching into a "like" sector from your position, will allow you to capture the tax deduction this year and still offer upside potential should the sector start to run up in value.  At the end of 30 days, you can sell the ETF and repurchase your original investment.  That is assuming you really want to buy your original position back.  Many times investors are so relieved to be out of an investment they never repurchase it again.

One question to ask as the year comes to a close is: "If I had all my money in cash, would I buy my current portfolio today?"  If the answer is no, think long and hard about why you are holding on to your undesired positions.

Other Year End Tax Considerations:

Contribute to your favorite charity

Make a tax-deductible contribution to a charity, or if you have appreciated stock, you might want to keep your cash in your pocket and donate stock.  You'll avoid paying tax on the appreciation, and you'll be able to deduct the full value of the stock.  You win, your charity wins, and the only loser is Uncle Sam.

Prepay your state and/or local taxes

If you believe that your tax bracket next year will be no higher than this year, and, you won't be bothered by any alternative minimum tax issues, consider making those state/local tax payments before the end of this year.  Realize that you're going to owe the money anyway.  So make those payments before December 31st and take the federal tax deduction this year.  Consult your accountant to review your specific situation.

Thoughts for the New Year

Every year right after the holidays, millions of Americans make resolutions to change some major part of their daily lives.  Usually, it's to lose weight, work out more frequently or save money.  How about resolving to focus on the things over which you actually have some control over.  One of the most important areas to apply vigilance on is your investment portfolio.  I call it applying the C.P.R. Method for controlling your investments. 

Control Your COSTS

Many investors are not aware of the hidden costs or fees associated with their investments.  For example, many mutual funds have hidden annual fees of over 2% to cover operating costs.  Index investing through Exchange Traded Funds (ETF) offers a much lower cost alternative with potentially better performance, transparency, and tax efficiency.

Review the rates you pay for wireless, long distance, credit cards, auto insurance, and mortgages.  Rates are frequently changing.  There are probably savings in all of these areas.  Review them!  Almost 100 percent of the time, you can lower your rates by switching providers.  When it comes to telephone numbers, laws now allow you to keep your same number that you may have had for years and transfer it to the new lower cost provider.

Monitor Your PERFORMANCE

Most investors already take a cursory look at their statements to see how they are doing, but a comprehensive review should be done monthly or at the very least quarterly.  There are two components to reviewing your financial assets.  The first component is to list each items individual investment return.  Rank each position from the top to bottom performers, based on trailing 12 months return.  It is important to comprehend which positions are your best to worst performers, based on return.  Determine how actual money much each is earning or costing you.

The second component of the review involves comparing each individual investment position to its own benchmark index.  Bloomberg.com or Morningstar.com are free websites that offer great tools to compare your portfolio components to its peer group.  No one desires to be average.  Ensure your investments are not performing below average on a trailing one year or longer, basis.

Control Your RISK

Profitable investing in the market is the consequence of two actions; buying things that go up and selling at a higher price than you bought.  It sounds so easy, but is often difficult to do, especially in a year like this.  It takes two decisions, not just one.  Most people are good at buying; few have a plan on what would prompt them to sell.  Add a "Stop Loss Sell Discipline" to cut your losses on any investment that drops 10% below your purchase price.  As your investment value increases, trail the stop loss below the rising price at a 10% level.  This will help you avoid taking big losses in the market.  It also helps protect your gains, and keeps most of the profits in your pocket when the markets go south.  Having a risk controlled sell discipline is probably the most overlooked aspect for achieving investment success.  Some years winning is just not losing too much.

When it comes to your portfolio, finish this year right by analyzing your investments and reviewing your tax situation.  As the Nike ads state ... "Just Do It"... now!  Ring in the New Year with a resolution of adopting an investment discipline that will control your COSTS, monitor your PERFORMANCE, and manage your RISK, by employing the CPR Method to your portfolio in 2009.  Enjoy the Holidays.

Jerry Slusiewicz is the President of Pacific Financial Planners, LLC., in Newport Beach Ca.  Call for a free comprehensive financial plan today (800) 449-9501.

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