As we approach the end of 2024, there is cause for optimism. The market has performed well, economic data indicates a strong labor market, and wages are keeping pace with inflation.
While we cannot control the uncertainty of the economy, market conditions, or the future tax environment, investors can create a well-structured plan to help achieve their financial goals. Doing so will provide some certainty amidst all the unpredictability.
Below, I have outlined six investment planning ideas to consider before year-end.
1. Year-End Investment Do’s and Don’ts
Do consider rebalancing your portfolio: Many parts of the market have risen in 2024. However, there may be individual investments within your portfolio that have declined or haven’t increased as much as other areas. This may include REITs, international stocks, and investment-grade bonds, all of which have underperformed compared to the S&P 500.
Given these market dynamics, many investors’ portfolios may be out of alignment, and it may make sense to rebalance your portfolio to ensure it is properly aligned with your risk tolerance.
Don’t chase past performance: Today—and every day—is a good reminder to stay away from the current “hot” strategy of the moment! Each year, there is always some investment or portfolio manager that does phenomenally well. Unfortunately, it’s impossible to know beforehand which manager, strategy, or index that will be. This won’t stop aggressive salespeople from capitalizing on recent successes, touting great returns, and encouraging investors to invest in yesterday’s winners.
As I always emphasize to my clients, the market moves in cycles. One year’s winners are often losers in the following years. The key is to stick with a proper asset allocation and straightforward investments that will allow you to achieve your goals. Chasing past performance will not work out in the long term.
Planning Tip: Consider setting up an Investment Policy Statement (IPS): One way to stick to a disciplined plan is by developing an IPS that helps define an investor’s goals, risk tolerance, and other considerations. This ensures you are on track to achieve your objectives and helps investors ignore the noise and slick salespeople trying to sell them imprudent strategies.
2. Reassess Your Cash Position
The question of the hour is where to keep your cash as yields drop well below the 5% that investors enjoyed throughout most of 2024. Below is a framework to help determine where to allocate these funds:
What is the purpose of the cash? Maintaining a sufficient level of cash helps families pay their routine bills and provides a cushion in case of an emergency. This typically amounts to 3-6 months’ worth of expenses. It’s also important to have enough cash for any short-term large financial outlays. Anything more than that may be financially imprudent.
The fallacy of “risking principal”: This phrase drives me absolutely crazy! Oftentimes, people will tell me that they like to keep their funds in cash equivalents so they “don’t risk losing their principal.” This shows a lack of understanding of risk and how it impacts our lives. Remember, money kept in cash for too long will inevitably lose buying power over time.
While the dollar amount appears to slowly increase every year, it is not rising as quickly as inflation. Therefore, if you intend on saving money for your future, keeping it in cash or bonds—which will underperform the rate of inflation—ensures you can buy fewer goods and services with your dollars.
Your time horizon: Ultimately, when you will need your money should determine where to put it. For example:
a) Cash equivalents: These should typically only be used for an emergency fund of 3-6 months’ worth of expenses, or possibly longer if you have a significant upcoming expense. Suitable cash investments for this bucket are money market funds, CDs, and perhaps T-bills. Even as rates continue to drop, you don’t want to risk short-term funds in other investments. The key is having liquidity when you need it.
b) Bonds: Bonds typically offer lower returns than stocks but higher returns than cash equivalents. They are useful for achieving intermediate goals since they help diversify a portfolio and reduce investment risk. If you have a goal that is less than 10 years away, bonds should be part of your investment strategy.
c) Stocks: Stocks are the ultimate investment for long-term portfolio growth. If you want your portfolio to grow over the long term and outpace inflation, stocks should be a significant portion of your holdings. Any investor with a 10-year or longer time horizon would be doing themselves a disservice if they don’t own enough stocks.
Planning Tip: Ask yourself the following question: What are you looking to accomplish with your money? Your answer will determine when you need the money and guide you to the correct decision based on the framework I just laid out.
3. Tax-Loss Harvesting
Tax-Loss Harvesting is the process of selling securities at a loss to offset a capital gains tax liability before year-end.
When reviewing portfolios with your clients, advisors should identify opportunities to strategically generate losses to offset other gains. For example, using a tax-swap strategy for mutual fund holdings allows you to realize a tax loss while retaining essentially equivalent market exposure. The key is that the funds are not “substantially identical.” This can be achieved by using different fund companies that track different indices or employ slightly different strategies but yield similar results. A common example is swapping out an S&P 500 fund from one company and buying a total U.S. market index fund from another fund family.
Minimizing short-term capital gains: This strategy may be used to limit the recognition of short-term capital gains, which are generally taxed at a higher federal income tax rate than long-term capital gains.
Planning Tip: One creative approach to tax-loss harvesting is to donate the cash proceeds from the sale of stocks that are at a loss. In this strategy, investors benefit from recognizing a loss by selling a stock that has decreased in value. The loss can offset any capital gains for the year or be used to offset up to $3,000 of ordinary income. That is in addition to the charitable deduction you receive for your cash donation from the proceeds of this sale.
4. Employer Retirement Plans
Assess contributions made this year: Review how much you contributed to your employer retirement plan this year. If you are financially able to, it’s worthwhile to max out your 401(k) or 403(b) if you haven’t done so already. In 2024, those limits are $23,000 before any company match, or $30,500 if you are 50 or older.
Be mindful of next year’s contribution limits: For 2025, the contribution limit increased to $23,500. Catch-up contributions will remain the same at $7,500 for those aged 50-60. Additionally, the IRS now permits an additional catch-up contribution for employees aged 60-63 of $11,250, instead of just $7,500. Don’t forget to make the required adjustments to ensure you are making the maximum contribution for the upcoming year.
Roth vs Traditional: The rule of thumb is that if you think you may have a high-income year, then a traditional IRA makes more sense. If you anticipate a low-income year, then a Roth IRA may be the better option.
Review your investment lineup and portfolio: Determine with your advisor if it makes sense to make any changes. This is especially relevant if your firm switched 401(k) providers recently, if you rolled over an old 401(k) into your IRA, or if you are approaching retirement. In any of these scenarios, tweaking your investments may make sense.
Consolidation of old accounts: If you have old retirement accounts still held at a previous employer, be sure to consolidate them into an IRA to keep your assets organized! It rarely makes sense to have old retirement accounts scattered at various institutions, especially at former employers.
Planning Tip: For clients with 1099 income or those who are self-employed, consider setting up a Solo 401(k). Even if you are maxing out your employee contributions through a W-2 job, you could still make a profit-sharing contribution into your Solo 401(k), deferring taxes on up to an additional $69,000 depending on your self-employed income. For people in a higher tax bracket, this strategy can allow them to defer more funds for retirement, reducing their taxable income and increasing their nest egg.
5. Budget Expense Goals for the Coming Year
It’s always essential for investors to assess their expenses and plan ahead for the future.
Cash Flow Management for Retirees: This is especially important, as retirees must evaluate how much cash they will need in the year ahead to live on and should work with their advisor to ensure they can meet their cash flow needs.
Mitigating Sequence of Returns Risk: Retirees should target a higher cash cushion than what is typically recommended for non-retirees to sufficiently mitigate the risk of experiencing lower or negative returns early in retirement, when withdrawals are made from an investment portfolio. The sequence of investment returns can significantly impact your portfolio’s overall value and, consequently, your ability to maintain your lifestyle in retirement.
Planning Tip: Over the past few years, expenses have risen due to inflation. For clients in the decumulation stage of retirement planning and drawing down their portfolio, the amount of money they need may have increased. While many financial advisors use 4% as the safe amount to withdraw from their nest egg every year, it’s worth reassessing these numbers annually based on personal circumstances, market performance, and the economic environment, including inflation, to see if anything has changed.
6. Consideration for Trump’s Tariffs
President Trump is a self-described “Tariff Man,” and he is likely to assess tariffs, especially against countries like China, which has been accused of stealing intellectual property and not playing by fair rules.
Planning Tip: The stock market is often the best way to outpace the inflationary environment that may be caused by tariffs. Make sure to incorporate this into your portfolio.
As investors prepare for 2025, the aforementioned investment suggestions will undoubtedly put folks on stronger financial footing.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. ParkBridge Wealth Management is not affiliated with Kestra IS or Kestra AS. Investor Disclosures:
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