Financial Planning: Smart and Not-So-Smart Year-End Moves

Around this time stock brokers and financial planners start calling their clients with year-end moves: rebalance/review the portfolio, sell the losers for tax purposes, tweak the financial plan. Great opportunity for them to generate new business to pick up that year-end bonus. What's in it for you? Should you take the bait?

Selling losers for tax purposes

On the surface it looks like a smart move, especially when you have a tax liability. But only on the surface. There is no conceivable reason to hold a losing position. None. If you buy right, you should sell as soon your position drops 5-10%. No questions asked. If you do it next year, you may not have huge losses to offset your other gains (assuming you have those), but the main thing is: you won't have huge losses. A long-term loss is a total no-no. Why would you want to hold a loser so long?

You can profit from year-end selling by buying stocks others are dumping. But don't just buy indiscriminately because a "good" stock is down. You still need to do your homework. Stocks are down for a reason.

But every once in a while a stock will start showing signs of a turnaround but institutions will still want to sell the losing position for window-dressing purposes (to make the annual statements look prettier). These are your best candidates for the new year as they may bounce strongly.

Portfolio review/rebalance

Another code word for generating sales commissions. A skilled salesperson will probe for areas of dissatisfaction for an easy sell. If it was his recommendation - well, there will be some solid objective reason why it did not work out and you should move on; someone else's - well, "how did they recommend this dog in the first place?" There sure will be a new toy to buy with the freed up cash. Is it really the best time to buy it

Remember that rebalancing boils down to selling the winners to add to the losers - the equivalent of "pulling the flowers and watering the weeds", according to Peter Lynch (One Up on Wall Street).

Financial plan

Changes in your life situation (death, birth, graduation, marriage, divorce, retirement, job loss/change) are the best motivators for taking action. Some of these situations may require legitimate adjustments to your financial plan but many can often be used to generate additional sales by "tweaking" your assets.

Your financial situation does not know a calendar. If you have to wait till the start of the year to muster the motivation to do something about your finances, chances are they are in pretty bad shape. You are better off addressing your concerns head on as they come up - if you really want to get ahead financially.

Most people are either over- or underinsured. How do you make sure you have the right type and amount? Simple: one does not insure against the probability of a loss, but for the severity of it. Ask yourself (without any undue sales pressure): what would happen if I lose this or that? Just don't kid yourself with fancy answers like: I will make more money trading stocks or get a higher paying job, as it may not happen.