Time for year-end rebalancing and tax-loss selling

Time for rebalancing and tax-loss selling

By Jonathan Chevreau on December 4, 2013
Estimated reading time: 2 minutes

'Tis the season to re-jig your portfolio and offset your capitals gains.

<a href="http://www.onewaystock.com/">One Way Stock</a> — One Way Stock

As I told radio reporter Mike Eppel on 680 News update this weekend, many financial advisers counsel some combination of portfolio rebalancing and tax-loss selling in the final few weeks of the year. Technically, rebalancing can occur any time of the year but it’s useful to pick the same time each year just in order to impose some discipline on the process. Late November or early December works for me, since the investor’s mind is probably also looking at non-registered portfolios for tax-loss selling candidates.[mp3j track=”https://www.moneysense.ca/wp-content/uploads/2013/12/awknd-biz-2-eppel-nov-30dec-11.mp3″ title=”Listen: Jonathan Chevreau on 680 News with Mike Eppel”] With taxable portfolios, the idea is to offset any capital gains realized over the year with an equal number of capital losses. Of course, it’s been a very good year for equities so outside of gold stocks and disappointments like BlackBerry, it may be difficult to find enough losses to offset gains. This is why some advisers suggest refraining from crystallizing gains until the new year. This does two things: first, it gives you an extra year before the capital gains taxes are due (i.e. April 2015 rather than April 2014); and second, who knows what markets will do in 2014? By this time a year from now there may well be many stocks with potential losing positions you can find to trigger in order to offset gains made elsewhere.

Rebalancing is simpler in registered accounts

In registered portfolios like RRSPs, RRIFs and TFSAs, tax should not be an issue, so it makes sense to take the traditional rebalancing advice to reset your asset allocation to where it was this time a year ago. That probably means your equity weight has gotten ahead of itself. Someone who began the year with a 60% stocks weighting may find stocks now account for 70% of the portfolio, in which case you could sell now to get it down to the 60% level, reallocating to asset classes that are flat or down. That might be bonds or, depending on your view of where interest rates are headed, you might choose to leave the proceeds in cash, even though this will pay little more than nothing net of inflation. P.S. Vanguard has a good 5-minute video on both rebalancing and tax-loss selling you can view here. It goes without saying that both these topics are important and the counsel of your investment adviser and/or tax professional would be invaluable. For more year-end tax tips, read Evelyn Jacks’ latest column, “Still time to cut your 2013 tax liability.”

For Norm Rothery’s top stock picks Jonathan mentioned in the audio clip above read, “The Top 200 Canadian Stocks.”

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.