By Justin May, Portfolio Manager

You’ve done your research and created a low-cost, well-diversified investment portfolio. Your financial plan is solid, and your allocation between stocks and bonds aligns with both your risk tolerance and future cash flow. The hard work is done, and you may be relieved to ignore your investments for a while. Or you, like many, may find yourself itching to tinker with your portfolio when you hear about the next hot investing strategy. Please don’t make that mistake.

Here are some productive activities for you and your portfolio while you wait patiently for it to grow:

• Rebalancing: Say, for example, you’ve decided on a portfolio allocation of 60% stocks and 40% bonds. If stocks rise and bonds stay flat, your portfolio may eventually total 65% stocks and 35% bonds. When this happens, you may choose to sell from your stock portfolio and buy bonds along your initial 60% stock/40% bond target. When the stock market drops, you may have an opportunity to sell bonds and buy stocks along your initial target. Rebalancing ensures you’re buying low and selling high.
• Tax Loss Harvesting: If you hold stocks in a taxable account (typically a brokerage account or a trust), you may be able to sell an investment for less than its original purchase price when the market drops. This creates a tax loss, which can be used to offset future taxable gains in your portfolio. Make sure that when you sell your stocks, you immediately buy similar stocks but avoid wash sales across all your accounts. Review your portfolio regularly for losses, remembering sometimes they can be hiding within small portions of large positions.
• Location Optimization: Generally, growth in IRA accounts is taxed at ordinary income rates; growth in taxable accounts is taxed at long-term capital gains rates (which are lower than ordinary income rates); and growth in Roth accounts is never taxed. Location optimization involves placing your highest-growth positions in accounts where growth is taxed the least, and vice versa. In practice, your Roth accounts won’t have any bonds, your taxable account may be more aggressive than your IRA, and your IRA may be your most conservative account. If you really want to get technical, consider the expected growth and tax efficiency of each asset class. High-growth asset classes with low tax efficiency, like emerging markets funds, are best placed in a Roth account.

While the urge to make frequent changes to your portfolio may be tempting, sticking to a well-thought-out investment strategy is key to long-term success. By focusing on constructive opportunities like rebalancing, tax loss harvesting, and location optimization, you can ensure that your portfolio continues to align with your financial goals without unnecessary disruption. Stay focused on the fundamentals, and your investments will continue to work for you.