2021 Year-End Investment Audit Guide – Forbes Advisor

It’s been a roller coaster year for markets, with many monstrous highs and a few worrying lows. This makes December the perfect time to conduct a year-end review of your investment and retirement accounts.

The S&P 500 is up nearly 22% year-to-date, driven higher by cash-flooded consumers and profit-making corporations. At the same time, volatility has increased significantly thanks to the omicron Covid-19 variant, helped by stretched stock valuations.

Bonds have had a tougher time, with the Vanguard Total Bond Market ETF (BND) down 1.5% so far this year on worries about long-term economic growth. Throw in inflation, and fixed income investors are in for a tough spot.

All of this means that your portfolio allocations may very well not match your goals. Additionally, it might also be time to consider year-end changes that could lower your tax bill.

1. Review your investment goals

Start your year-end investment review by reviewing your investment and retirement goals. You may have reached milestones this year, so reviewing your list of goals for the coming years will help you understand where you need to focus your attention.

For taxable investment accounts, consider the goals you’ve achieved and the ones you’re still working toward. If you’ve added short-term or long-term goals, decide whether you want to open separate accounts to pursue them or manage everything in one account.

For retirement accounts, check to see if you’re on track to meet your retirement savings goals, especially if your investments are keeping pace with inflation. If you continue to contribute to low-cost index funds, this probably won’t be a problem. But many workers cut their contributions, retired and found themselves without an employer retirement account, or left the workforce altogether to care for children, elderly parents or themselves. .

“Part-time workers were more likely to be negatively impacted by the pandemic than those working full-time,” said Catherine Collinson, executive director of the Transamerica Center for Retirement Studies. “Part-time workers were more likely to have reduced hours and receive less support from their employers.”

Whichever description works for you, it’s time to assess your progress. If you were lucky enough to keep a full-time job this year and have a pension plan at work, you should continue to contribute to it until the end of the year. Those who contribute to Individual Retirement Accounts (IRAs) have until they file their taxes on April 15, 2022 to make contributions for the 2021 tax year.

If you faced a job loss or a drop in income in 2021 and were forced to cut your savings, adjust your retirement goals and plan contributions for 2022. And don’t consider 2021 as a lost year; compound returns increase your wealth even when you are unable to make new deposits.

2. Reevaluate your risk tolerance

Stocks crashed when Covid-19 first spread across the globe in early 2020, but since then have only risen with a few hiccups. It took less than five months to recover from the initial 34% crash of the pandemic in early 2020, according to CFRA chief investment strategist Sam Stovall. And it only took about two weeks to recover from the September 2021 setback.

This nearly two-year recovery may cause you to channel your inner Warren Buffett, or at least increase the amount of risk you think you can handle. But it’s when the markets falter that you get a true sense of your own risk tolerance—that is, your willingness to endure losses now in pursuit of bigger gains in the future.

If you felt nauseous or panic-sold your investments in early 2020 or fall 2021, take the time now to reassess your portfolio. On the other hand, if you’ve delayed adding stocks, you may want to get more aggressive in the new year as low bond yields hurt returns.

For taxable investment accounts, opt for individual stocks and more aggressive asset allocations to add more risk to your portfolio. Those looking to invest in individual stocks should look for companies and sectors poised to rebound as the economy approaches pre-pandemic levels.

Investors who feel they need less risk but still want moderate equity exposure can look to securities such as exchange-traded funds (ETFs) and index funds that invest in a very large portfolio of stocks but don’t experience the big rises and falls that the individual stocks themselves do. Check out our list of the best total stock index funds to find out where to start with the funds.

More risk-averse investors should continue to add money to bond investments, such as a total bond market index fund. But in the current low-yield environment, bond-heavy portfolios mean investors will likely have to contribute more of their own money to achieve their goals. The stability and certainty of fixed income securities, however, can be worth it, especially for short-term goals.

For retirement accountsconsider how close you are to retirement and whether your current allocation should shift more toward capital preservation through conservative holdings like bonds or cash for emergencies and away from the growth offered by equities.

If you want to pursue a strategy that adapts to your goals over time with less heavy lifting, consider a robo-advisor or target date fund that automatically rebalances and adjusts your risk as you get closer to retirement. . To learn more about how to optimize your retirement investments, check out our guide on how to invest for retirement.

3. Rebalance your portfolio

This process of selling off some of your assets and investing the money you recover in other areas of your portfolio is called rebalancing. This helps ensure that your investment portfolio stays aligned with your goals. Even if your risk profile has not changed, you may still need to adjust your portfolio holdings due to investment growth.

“Several widely held individual stocks posted sizable gains [in 2021]said Tracie McMillon, head of asset allocation strategy at Wells Fargo Investment Institute. “It may make sense to take profits and reinvest in other areas of the markets.”

For taxable investment accounts, consider tax-loss harvesting. Andrew Rosen, CFP, investment advisor at Diversified Lifelong Advisors, says it’s important to be proactive when it comes to tax management. If you sold when the markets were down, for example, you might be able to take those losses and use them to reduce your taxable income for 2021 – and potentially beyond if the total is over $3,000. .

If you’ve managed to hold steady and make sizable gains in some booming sectors like consumer goods and big tech, you might want to sell a little to bring your portfolio allocation back to your desired distribution.

While it may seem counter-intuitive to sell stocks that have performed very well recently, it helps control your overall risk tolerance going forward. Check out our guide to portfolio rebalancing for strategies to reduce your tax burden when you do.

For retirement accounts, revise your asset allocation, even in accounts you haven’t contributed to in a while. Stock market gains in 2021 and falling bond yields may make your distribution more aggressive than you want in the long run, especially if you are far from retirement.

Other strategies to consider

If you want tax-free withdrawals in retirement, now might be the time to convert your traditional IRA to a Roth IRA. This move, called the Roth IRA conversion, could be especially helpful for those who have been slow to return to the workforce.

“By [doing the conversion]you will probably pay less tax [on converted funds] because your income has gone down, putting you in a lower tax bracket,” said Steve Azoury, financial adviser and owner of Azoury Financial.

If you’ve been hit hard financially this year, you could find yourself in the lowest tax bracket of your life until you retire. If so, now is a particularly good time to perform a Roth IRA conversion, if you can afford to pay any additional taxes you may incur in the process.

Step boldly into 2022

Our checklist covers the main tasks you need to consider at the end of 2021. If you have questions about your particular financial situation and how best to manage your finances at the end of the year for the year ahead , contact a financial advisor to get the knowledge and expert advice you need to keep your goals on track.