As we approach the end of the year, it's crucial for investors to prepare their portfolios for 2024 and the future. Start with fundamental tasks like funding your IRA, paying off high-interest debt, and exploring tax-loss harvesting in taxable accounts. Increase your 401(k) contributions as well, taking advantage of the IRS's raised limit to $23,000 for 2024.
A strategic move is to consider converting a traditional IRA to a Roth IRA. This step involves paying taxes now, but it allows your investments to grow tax-free in the Roth account. This is particularly beneficial for those expecting to be in a higher tax bracket in the future or planning to leave Roth IRAs as inheritance.
Jonathan Shenkman, President and CIO of ParkBridge Wealth Management, advises considering a Roth conversion now, especially with potential tax changes looming and the expiration of Trump-era tax cuts in 2025. Congressional action on federal budget deficits might involve tax increases, spending cuts, or both.
Investors should then focus on long-term portfolio strategies to capitalize on the shift to more conventional market dynamics. With the Federal Reserve nearing the end of interest rate hikes, the economy is expected to grow moderately. Bonds are now more attractive as income sources, and stock performance is increasingly linked to corporate profits. According to Lisa Shalett, Chief Investment Officer at Morgan Stanley Wealth Management, we're returning to a "normal" market.
The market has shifted significantly from the low interest rates and minimal bond yields post-2008-09 financial crisis. The FAANG stocks and a preference for U.S. equities have driven success, but this approach may not be as effective in the future. Mortgage rates, for example, are nearing 8%, and investors can earn around 5% in money-market funds - levels not seen since 2007.
At year-end, reevaluate your portfolio and financial goals, ensuring the right asset allocation. Rebalance to avoid being overweight in cash or stocks and underweight in bonds. Consider a 60/40 stock/bond mix and look at deploying cash effectively. Be cautious with high-value tech stocks like Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla, which may not perform as well in the future.
For your stock portfolio, reassess allocations within it. The Magnificent Seven have dominated the market, but it's essential to avoid being too heavily invested in them. Evan Bloomberg, a private wealth advisor at UBS, recommends evaluating concentrated positions and ensuring they align with your financial plan. Morgan Stanley's Shalett suggests a slight underweight in equities, favoring sectors like healthcare, energy, industrials, and small-caps.
Regarding international stocks, their performance has lagged behind U.S. stocks, but this might change. Vanguard projects higher 10-year annualized returns for non-U.S. developed markets equities compared to U.S. stocks. Sequoia Sentinel Family Office recommends maintaining a substantial allocation to international equities.
For cash holdings, ensure they're generating income, given the higher interest rates. Reconsider the fixed-income portion of your portfolio, with advisors suggesting longer-dated Treasuries to lock in current yields. Kestra Investment Management’s Kara Murphy notes that bond yields are now more attractive than they have been in years.
Retirees or those nearing retirement should particularly benefit from the higher yield environment. Shenkman of Park Bridge highlights the importance of maintaining equity exposure to outpace inflation.
For high-net-worth individuals, consider allocating to alternative investments like private credit and real estate. KKR suggests a mix of bonds, stocks, and alternatives, including private credit, real estate, and infrastructure.
In summary, ensure your portfolio aligns with your financial goals and adjust it quarterly. Avoid basing decisions on past market conditions, and prepare for a more normalized market environment. Remember, the right allocation is one that helps you achieve your financial aspirations. A portfolio linked to a financial plan is significantly more powerful, as noted by Kestra’s Murphy.
