The Importance of Diversification: Exploring Asset Allocation Strategies for Long-Term Growth
Investment diversification is the process of investing across various asset classes, industry sectors and geographic regions. Diversification is the investing version of the old adage: “do not put all of your eggs into one basket”. Diversification is about the trade-off between risk management and achieving solid investment growth over time. Diversification and asset allocation Asset allocation and portfolio diversification have become almost synonymous. Different asset classes have different characteristics and often react to market and economic conditions in different ways. In diversifying your portfolio, you will want to include some asset classes that have a relatively low correlation to each other. For example, large cap U.S. stocks and bonds only have 26% correlation to each other. This means that only 26% of the movement of each asset class is tied together; the other 74% is based on factors unique to each asset class. The right asset allocation will vary from investor to investor. Factors to consider include your investing time horizon, your risk tolerance and your investment goals. Diversification can help mitigate losses when the markets are in a downturn, or in the case of bonds, when interest rates are rising. Types of Asset Classes At a high level, core asset classes include stocks, bonds and cash. Within these asset classes are sub asset classes for stocks and bonds. Some sub-asset classes for stocks include: ● Domestic stocks ● Non-U.S. stocks ● Large-Cap ● Mid-Cap ● Small-Cap ● Growth ● Value ● Emerging markets With bonds, there are long-term, intermediate term and short-term bonds. There are corporates, municipal bonds and Treasuries among a number of others. Stocks represent ownership in a company. Shareholders are hoping to share in the success of the company through gains in the stock price. Many stocks also pay dividends, which is a way that many company boards of directors look to share the company’s profits with shareholders. Bonds are essentially a loan to the issuing company or governmental entity. Bondholders receive interest payments at regular intervals, typically semi-annually. Upon maturity, the bond holders receive the face value of the bond. Diversification Strategies & Rebalancing Your Portfolio Many investors establish a target asset allocation and look to maintain their target allocation to stocks, bonds and cash. The allocation will often include an allocation to sub-asset classes like small-cap stocks and intermediate term Treasuries, for example. Allocations to holdings in certain sectors like energy or technology can also help you diversify your portfolio. It is important to monitor your portfolio’s asset allocation. We do not suggest frequent rebalancing, but we do suggest reviewing your allocation quarterly, semi-annually or at least annually. It is a good idea to set acceptable percentage ranges for each asset class. If the allocation is above or below that range, then it is time to rebalance by either adding to the asset class or selling holdings. There are a number of strategies that can be used in the course of rebalancing including tax-loss harvesting in taxable accounts and using new contributions to add to asset classes that need additional funding. Tools and Resources for Diversification While individual stocks and bonds can be used in building a diversified portfolio, mutual funds and ETFs are also excellent building blocks. Index funds offer the added benefit of generally being true to their investment style, making asset allocation and rebalancing a bit easier. For those who have both tax-advantaged retirement accounts like 401(k)s or IRAs, be sure to include these accounts in your overall diversification strategy. It can often be more tax-efficient to do some of the trades needed to bring the portfolio back into its target allocation range in a 401(k) or IRA account. An experienced financial advisor can be your best source for advice on the right level of diversification for your investment strategy. They can help with asset allocation, rebalancing, sector allocation and surety selection. An advisor can help you integrate your asset allocation with your overall financial planning strategy. Conclusion Diversification is an important part of your investing strategy. A properly diversified portfolio can help ensure long-term growth while helping to mitigate downside risk. It is important to review your portfolio’s asset allocation on a regular basis and to rebalance your portfolio as needed. This can help you stay on track towards your goals. We encourage you to reach out to your Wedbush financial advisor for help establishing the right diversification strategy for your portfolio and for help reviewing your diversification over time. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. The information in these materials may change at any time and without notice.
Tax Planning Tips for the Mid-Year: Maximizing Opportunities and Minimizing Liabilities
Tax planning is a way for individuals to review their projected tax liability and to make adjustments prior to the end of the tax year. Mid-year is a good time to review your tax situation to see where you stand in relation to where you thought you might be for the year. Mid-year is a time when many investors often review their portfolios and investment strategy to see if they are on track. Are there changes in your income or other areas that might impact your tax situation for the rest of the year? If so you still have time to make adjustments in order to avoid an unpleasant surprise come tax time. Assess your current tax situation Your mid-year tax review should focus on your current situation and any differences in what you may have planned on in terms of income or deductions. For example, you may have learned that you are in line for a year-end bonus that is higher than you expected. Are there other changes from the prior year that will impact you when it is time to file your taxes? Have you or will you be getting married or divorced before the end of the year? Are you expecting an addition to your family due to the impending birth or adoption of a child? These or any number of income or life changes can impact your taxes for the year. Maximizing Deductions and Credits This is a good time to take a look at potential deductions that you are not taking or maximizing. For example, if you are charitably inclined, look at your normal annual contributions and see if you can afford to make several years’ worth of contributions in the current year in order to be able to itemize deductions on your return. Another example might be an elective medical procedure where you know you will have substantial out-of-pocket costs. If you have other expenses that could be itemized, consider having this procedure done this year. If this brings your out-of-pocket medical costs to more than 7.5% of your adjusted gross income (AGI), you can deduct this excess amount. Retirement Contributions and Planning A key tool in reducing taxes can be contributions to a traditional retirement account like a 401(k). The contribution limits for 2023 are $22,500, with an additional $7,500 in catch-up contributions available for those who are 50 or over. These pre-tax contributions provide both a current year tax break as well as the opportunity to build retirement savings on a tax-deferred basis over time. If you have access to a 401(k) or similar retirement plan, look at your current level of contributions and see if you are able to increase it if you are not currently on track to hit the maximum level for the year. Since contributions are made via payroll deduction, this can be a painless way to increase your contributions and get a significant tax break. Capital Gains and Losses So far in 2023, we have seen a fair amount of market fluctuations with solid gains in some areas including technology stocks. This is after a tough year in 2022, preceded by gains in the prior three years. Mid-year is a good time to review any capital gains or losses within your portfolio. For securities held for at least one year, capital gains are taxed at preferential long-term capital gains rates. In the course of any portfolio rebalancing at mid-year, you might consider realizing long-term capital gains in taxable accounts if selling some of these shares fits into your rebalancing plan. Additionally, you may be able to offset some long-term or short-term capital gains against any realized capital losses. This can be a tax-efficient way to accomplish any needed rebalancing. Charitable giving For those who are charitably inclined, charitable giving can be personally satisfying and financially rewarding. Charitable contributions can be made in cash or by donating appreciated assets such as stocks, mutual fund or ETF shares, art, real estate and other assets. Donations can be made directly to the charity or to a donor advised fund. The amount that can be deducted will vary based on the type of deduction made. In order to deduct a charitable contribution, you will need to be eligible to itemize deductions on your return. Donating shares of appreciated securities can be beneficial in that not only will you be able to deduct the market value of the shares, but you will not be responsible for paying any capital gains taxes either. Record keeping is important. Be sure to keep any acknowledgment received from the charitable organization, a copy of checks written or other documentation in order to be able to verify the donation if the IRS questions it. Estimated tax payments and withholding As you review your tax situation at mid-year, be sure to review your tax withholding to be sure it is on track to cover the expected tax on your income from the year. For those who must pay estimated taxes, typically small business owners, freelancers and independent contractors, you will also want to review whether these payments will be sufficient to cover your projected tax bill for the year. In either case, you do not want to come to the end of the year and find out your tax bill is much larger than what you have paid in. This is a good time to consult with your tax advisor to help determine where you stand taxwise for the rest of the year. They can also help to ensure that you are in compliance with any new regulations or changes in the tax rules. If you do not have a tax advisor, or feel you need to find a new tax professional, your Wedbush financial advisor can be of help. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is
Traveling Abroad? Protecting Your Finances and Managing Currency Risks
It is officially summer, and many people will be traveling. Some reports indicate that the level of travel will approach pre-pandemic levels. Further, many Americans will be traveling abroad this year. While planning their itinerary is a key focus, it is important to be aware of the potential financial issues involved with international travel. Understanding the impact of any currency fluctuations against the U.S. dollar and budgeting for your trip are two key planning steps you should take to help ensure a fun and valuable travel experience. Understanding currency risks The value of currencies relative to one another can fluctuate over time. This fluctuation can be accelerated by political and economic events that may occur from time to time. If you need to convert dollars into the local currency, you might get more or less of the foreign currency for your dollars at various times. Credit cards are not immune from currency fluctuations either. You may end up spending more than anticipated if the dollar drops in value significantly between the time you make the credit card transaction and the transaction posts to your account. Researching Exchange Rates and Conversion Fees It is important to find a reliable source to research and track currency exchange rates between the U.S. dollar and the currencies in the country or countries that you will be traveling to. There are a number of reliable currency conversion apps that you can download to your phone. The Federal Reserve and a number of major commercial banks also have this type of information on their sites. Before you travel, you will want to research rates from different sources such as banks and currency exchange services so that you can have a plan as to where you will be converting currency while traveling if needed. This is important, as even a small difference in the exchange rate can add significant costs to your activities and purchases while traveling. Budgeting and Preparing Finances Whether traveling domestically or internationally, having a budget for your trip allows you to plan and set aside money for the trip over time. This is not to say that you will not incur some spontaneous expenses while traveling, but having a solid budget in place helps you plan out the bulk of the costs for the trip. The costs of your flight and lodging should be easiest to estimate. You can do some online research through travel sites and other sources to estimate the cost of food and travel to different regional destinations while traveling. Perhaps you will be staying in a city but want to travel to see certain sites within the country or region. Planning for the cost of these excursions can help keep costs in line. There are pros and cons to both carrying cash and using credit cards. Converting money to the currency in the country you will be traveling to locks in a currency exchange rate and mitigates the risk of an unfavorable rate when you are actually traveling. The downside to carrying a lot of cash with you is the possibility of being robbed. Credit cards are a convenient way to pay for things while traveling, but you are at the mercy of the exchange rate in effect when you spend money, plus any extra fees your credit card company may charge for purchases made outside of the United States. If you plan to use a credit or debit card for purchases while traveling abroad, it is a good idea to notify your bank or the card issuer of your plans so they will not inadvertently cancel your card mid-trip, potentially leaving you stranded without the means to pay for expenses. Travel Insurance and Currency Protection Products Those who will be traveling abroad should consider purchasing travel insurance for their trip. This is a relatively inexpensive way to handle trip disruptions such as lost baggage or a travel delay. Many credit card companies offer these policies, especially those that specialize in being good cards for travel. Policies are available through some private insurers as well. Just as with your investment portfolio, you should consider diversifying your payment options while traveling abroad. Having some local currency, a solid travel credit card and a prepaid travel card that you can use to make payments for goods and services in the local currency. Monitoring Accounts and Reporting Suspicious Activity It is always a good idea to monitor activity in your bank and credit card accounts, but this is especially true when traveling. Transaction systems in the country in which you are staying may or may not have proper security in place. In addition, be sure to keep copies of receipts for all transactions as a record of what you did and did not spend. You will also want to take steps to keep data safe while traveling. If you use the wi-fi at your hotel, consider using a VPN (virtual private network). Be sure to clear your internet browser after each use to delete cookies, browsing history, cache and other files. Hackers can access your private information via your browser. Conclusion Protecting your finances and managing currency risks while traveling abroad is vital and can help ensure you can focus on enjoying your trip rather than worrying about the added costs that can arise from having to exchange currency at high rates. Consider the strategies suggested above to ensure a smooth and financially secure trip. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may