In my decades of advising clients and managing their investments, I have found that most of us know the general principles of investing: approach it with a long-term mindset, diversify your investments, and be prepared to weather the storm when the markets become unsteady.
However, one of the most valuable aspects of being a financial advisor with knowledge of taxation is being able to implement investment solutions for clients through lesser-known strategies. With my background as a CPA, I can make sure your portfolio includes tax-intelligent investments. Here are a few unique investment strategies that may work for your financial goals.
Diversify—But Beyond the Usual Suspects
Diversification is a well-known investment principle, but many investors limit themselves to stocks and bonds when there are many other options for you to consider (and even a few making a “comeback”).
- Alternative Investments: These investment opportunities are becoming more common and include options such as private equity investments for private companies not listed on public exchanges. Investing in these types of funds can offer higher returns than traditional investments but also carry higher risk. You'll want to carefully review these opportunities with your advisor to make sure they fit your risk tolerance and goals.
- Certificates of Deposit: Yes, they’re back! A certificate of deposit (CD) is a federally insured savings account that offers a fixed interest rate for a defined period. This can be a great short to medium-term investment option, as common investment lengths are typically one, three, or five years. It is an ideal strategy for money you have plans for, but can live without for some time, like a down payment for a home or sending kids to college.
Pre and Post Tax Investments
When it comes to retirement savings accounts and investments, you want to explore having more than a traditional 401(k). A 401(k) is a great place to start, especially if your employer offers a match, so hold onto that account and contribute each pay period. However, when it comes time to retire, you will be taxed on your 401(k) distributions.
Since no one knows what the tax rates will be when you decide to retire, a way to hedge the taxes is to also save for retirement on a post-tax basis through an IRA or Roth IRA. This way, come retirement, you’ll be able to access some funds whose taxes were paid years ago, making you less susceptible to tax changes that occurred over decades.
Tax-Intelligent Investment Strategies
Aliciene Tax & Financial Solutions began as an accounting firm, and we still approach finances through a tax-effective lens. Taxes can sometimes present unexpected deductions or erode returns on investments, so we are always balancing this reality with our client’s portfolios and pivoting where we can to maximize tax savings. Here are a couple of strategies we use to harness the power of tax-intelligent planning:
- Tax-Loss Harvesting: This strategy involves selling losing investments to offset gains from those that are performing well, reducing your overall taxable income.
- Municipal Bonds: Municipal bonds, or "munis," are debt securities issued by governmental entities to fund public projects such as schools, highways, and infrastructure. A key feature of many municipal bonds is that their interest income is often exempt from federal income taxes and sometimes state and local taxes as well, making them an attractive option for investors seeking tax-advantaged income.
- Donate to Charity: Consider donating appreciated securities from stocks, bonds, and mutual funds (as long as they have been held for more than one year) to avoid paying capital gains tax on the appreciation.
Rebalance Regularly
Rebalancing an investment portfolio involves buying and selling investments to maintain a desired mix of assets and can potentially enhance returns. We regularly do this for our financial planning clients, taking into consideration the client’s risk tolerance, goals, and timing. Based on your circumstances, we recommend rebalancing annually, semi-annually, or quarterly to keep your portfolio aligned with your goals.
Stay Informed and Flexible
Markets change, and so should your portfolio. We’ll help you stay updated with financial news, economic indicators, and market trends, and can adjust your strategy as new information becomes available or as your circumstances change. Investing is a long game, so remaining open-minded can be particularly advantageous for investors.
Building a resilient investment portfolio requires a blend of traditional wisdom and innovative strategies. Whether you're just starting or looking to strengthen your existing portfolio, these lesser-known tips can provide the edge needed for resilience. Remember, the best portfolio is one that aligns with your goals, risk tolerance, and time horizon. Happy investing, and we’re here to help.
Diversification does not assure or guarantee better performance/profit and cannot eliminate the risk of investment losses in declining markets.