At this point, many of us are eager to bring 2020 to a close and move on into 2021. But before the current year wraps up, there are a few important investing moves you should consider making. Tackling these will set you up for a more financially sound year ahead.
1. Review your asset allocation
The investments in your various accounts -- brokerage, IRA, or 401(k) -- should be invested in an age-appropriate manner. As the year winds down, take a look at your investments and make sure that's the case.
If you're in your 60s, and it's possible that you'll be retiring in the near term, you'll probably want to shift some of your assets away from stocks and into bonds, since they're far less volatile. Similarly, if you're fairly young, you don't want to go too heavy on bonds since they'll stunt your portfolio's growth. Establish an asset allocation strategy that works for you based on your risk tolerance and age rather than coast into the new year without giving your investments much thought.
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2. Make sure you're happy with your level of diversification
A diversified portfolio can protect you from losses, and given the uncertainty that lies ahead as we approach 2021, that's an important thing. Take a look at your portfolio in the coming weeks and make sure you're well-diversified within each asset class you're holding. For example, you shouldn't own 12 different energy stocks, eight tech stocks, and nothing else. If so, you're closing off many corners of the market and are subjecting yourself to potential losses if those particular segments take a hit. In that scenario, you'd want to consider selling off some current positions and replacing them with companies in different sectors -- say, healthcare, automobiles, and banks, to name just a few.
Another option for quickly diversifying is to buy index funds. An S&P 500 index fund, for example, will effectively let you invest in the 500 largest publicly trading companies with a single purchase.
3. Dump losing stocks to reap the tax benefits
It's generally not a good idea to sell stocks when they're down, but that applies in situations when the market tanks on a whole. If you have an outlier or two in your portfolio -- stocks that keep losing value while the rest of the market keeps going up -- then selling them before year's end could work to your advantage.
First, by doing so, you'll free up money to invest in stocks with the potential to perform better. But just as importantly, you'll enjoy some lucrative tax savings. Whenever you sell investments at a loss, you can use it to offset capital gains. And if your net loss exceeds your gains for the year, you can apply it to offset up to $3,000 of ordinary income, which could lower your 2020 taxes and potentially set you up for a higher refund in 2021.
Though 2020 may be on its way out, there's still time to make a few key investing moves that will serve you well in 2021 and beyond. Take the time to check these items off your list -- and then go ahead and celebrate the end of one of the craziest years many of us have ever had.
