After decades in the markets, I’ve come to accept two simple truths. First, it’s so difficult to predict tomorrow’s markets that it’s not even worth trying. Second, our futures are ours to control. These two truths might seem opposed to each other, but they aren’t at all. All I’m saying is that as we go out further in time, most short-term randomness should cancel itself out.
That’s the long version of saying that, over time, the investment returns I earn will be directly related to how much risk I’m willing to take of less than the expected return. For a while, markets were trying to fool us into believing that we could forget all that, but this year put that rather wishful belief to rest.
If you fell for it believing that we were in a brand new technology-driven era and all one needed to do was buy high-momentum stocks and hold for dear life, I feel for you. It’s a humbling lesson virtually every investor must learn by living through it. Unfortunately.
But every cloud has a silver lining, as they say. It’s time to clean house. Harvest those losses, take modest gains in the investment choices you regret (you don’t think capital gains taxes will ever go lower than they are now, do you?). Here’s what I hope you’ll lose:
1. Poor performers. It’s normal for some investments to perform well over some part of the market cycle but less so in others. But there are some funds and stocks that are simply duds.
If one of your investments had the opportunity to shine at least some time over a wide variety of economic conditions and hasn’t, take the loss and move on to other choices with better prospects.
2. Gimmicky investments. Did you impulsively buy something that now makes less sense? A Llama Repopulation Fund, maybe? What about that Inverse Two Times Leveraged Floating Eurodollar Fund? Show it the exit.
3. Tactical asset allocation funds. These funds are often both expensive and pointless. The proportions of stocks, bonds and cash in your portfolio should reflect your risk tolerance, not the market expectations of some fund manager who doesn’t know you exist.
4. Concentrated positions. Do you have too much money in one asset? It’s great if it works out, but if you’re no longer as much of a fan, take a load off and invest it elsewhere.
5. Investments that are counter to your values. If your sole focus when investing is to make money, that’s OK. But, with such a wide variety of options available, you don’t need to settle for investments that offend your personal values. Often you can achieve diversification that’s very close to portfolios with no social or environmental constraints.
I don’t imagine it’ll be easy to take these steps, especially if they involve taking capital gains. It’s also always a good idea to check in with a tax adviser before acting. But the more you leave the benefits of scientific portfolio construction on the table, the less confident you should be of having the funds you want when you hope to have them.
Evan R. Guido is the founder of Aksala Wealth Advisors LLC, a 2018 Forbes Next-Gen Advisors List Member, and Financial Professional at Avantax Investment ServicesSM. Evan heads a team of retirement transition strategists for clients who consider themselves the “Millionaire Next Door.” He can be reached at 941-500-5122 or [email protected] Read more of his insights at heraldtribune.com/business. Securities offered through Avantax Investment ServicesSM, member FINRA, SIPC. Investment advisory services offered through Avantax Advisory ServicesSM, insurance services offered through an Avantax affiliated insurance agency. 8225 Natures Way, Suite 119, Lakewood Ranch, FL 34202.
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