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Time to Rebalance Your Portfolio

Written by Rick Imhoff, CFP ®

If you have not already rebalanced your portfolio, now is a good time to do it. Here are two things to keep in mind for the taxable portion of your portfolio:

Don’t be Afraid to Realize Losses

If you look at your portfolio and you see one, two, or maybe more individual stock, mutual fund, or ETF holdings that are currently at a loss, don’t make the emotional decision to hang on to them in the hopes that they will get back to at least what you paid for it and then maybe sell it.  In most instances, you will likely not sell it when it does recover.  A better move would be to sell them now, realize the loss, and use the loss to offset other realized gains if any, and if none, you can deduct up to $3,000 of net capital losses on your 2022 income tax return when you file next year, potentially saving you several hundred dollars in taxes depending on your tax bracket.  Not only do you get the benefit of reducing your income taxes, you also don’t have to look at that loss every time you look at your portfolio.

Of course, this may be a stock, mutual fund or ETF you would like to hold as a longer-term investment.  Go ahead and take the loss anyway, wait at least 30 days and buy it back.  You get the benefit of realizing the tax loss on your tax return and can buy it back at a lower price.

In the event you have more than a $3,000 net realized capital loss, you can carry forward the additional loss into future tax years.  This could also be beneficial in later years when you have significant unrealized gains and need to rebalance your portfolio to bring it back in line with your desired target allocation.  The carry forward losses can be used to offset part or all the realized gains during good times.

Consider Shifting Your Asset Allocation

With rising interest rates, it may be beneficial to shorten the maturities of your allocation to fixed-income securities.  For example, if your current average maturity or duration is around 5 years, if you were to shorten that to 3 years, you would potentially reduce the decline in your fixed-income securities and having quicker maturities to roll out and capture higher yields if rates continue to rise.

On the equity side, you may consider shifting to more value-oriented stocks versus growth-oriented stocks to potentially help reduce the overall decline of your portfolio in relation the major stock market indices.  Value stocks tend to do fairly well during inflationary times and during times of rising interest rates.  However, they tend to lag during strong stock market performance, but for most investors, that is not a concern in the present environment.

Rick Imhoff, CFP®, is Executive Vice President & Senior Trust Officer for MidAmerica National Bank. He can be reached at (309) 647-5000, ext. 1130 or by email.

Investments are not FDIC-insured, hold no bank guarantee, may lose value, are not a deposit, and are not insured by any federal government agency.