Year-End Mandates

As the year draws to a close, two topics are top-of-the-mind issues for many investors. The first is how to develop next year’s investment strategy now that Obama has won another term; the second – and most pressing concern – is how to shield their investment portfolio from the more immediate prospect of higher taxes next year.

The weeks leading up to the year’s end are traditionally a time when investors review and rebalance their investment portfolios, but this year the task has taken on a whole new meaning and sense of urgency. In the past, it’s been a time to weed out the nonperformers. This year, the focus has been on taking profits while tax rates on dividends are at their current (low) rates. For very wealthy investors, the overriding goal has been to record as much of their future income as possible on this year’s balance sheet. This has taken the form of collecting one-time special dividends to take advantage of current tax rates and selling businesses and stocks that have been big winners. This year, law firms and real estate companies have reported an unprecedented volume of year-end business as investors and business owners try to finalize transactions before Dec. 31.

Individual investors are mimicking the patterns set by the mega-rich. Up until now, stocks that pay big dividends have been popular with investors faced with low rates of return on bank savings and Treasuries. Worried by predictions that if no action is taken on Capitol Hill, the top tax rate on dividends could climb to 39.6 percent from 15 percent and capital gains taxes could rise to about 20 percent from the current ceiling of 15 percent, some investors are selling off large portions of their portfolios and divesting themselves of blue-chip stocks they previously favored.

For their part, publicly traded companies are trying to address investor concerns. Some are moving up payments of fourth-quarter dividends in to December 2012 rather than January 2013 to enable shareholders to take advantage of current tax rates.

The coming year is almost upon us, and contrary to what the headlines say, there will be life after the fiscal cliff. Some sort of deal will be made, and investment life will go on. Above all, don’t act hastily. Sit down with your tax expert and discuss your best end-of-year strategy.

Some Good News

The stock market is in great shape. Look beyond the year’s ups and downs, consider the global economic and geopolitical crises, and the market shows a solid advance under the Obama presidency. Market data (as of the first week of November 2012) showed the S&P 500 up 76 percent since President Obama’s inauguration in January 2009, and the Nasdaq 100 up 128 percent (comparable figures were a 15 percent decline in the S&P 500 and a decline of 45 percent for the Nasdaq under President George W. Bush).

Sectors that might be expected to do well in a second Obama administration mirror those that triumphed in 2012, including health care (insurance companies, drug makers and health care providers), home construction (furniture, appliances and all the other segments that benefit from spending on new homes), as well as financial services.

There is every reason to expect as good an outcome for stocks in Obama’s second term as the first, but don’t forget the first term brought economic challenges, turbulence and rough patches to investors, too.

The observations above are intended as general commentary. They are not intended to replace advice from professional tax and investment counselors.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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