Paul's Insights: Spring clean your investments this tax time
As much as we all love to get money back on tax, completing a tax return inevitably means going over a year’s worth of paperwork, from bank statements to investment records.
It can be something of a trip down memory lane. But it can also confront us with some hard realities – like how much we spend, and how well – or poorly – our investments have performed over the past 12 months.
On the spending front, experience tells me that Australians frequently underestimate how much they pay for financial products. Research by UBank found 85% of home owners don’t know their home loan rate. If the vast majority of us are hazy about the cost of our mortgage, it’s a fair bet that plenty of investors don’t have a clear idea of the fees they are paying on investments.
This tax time, don’t just go through the motions of completing your tax return. Use the opportunity to take a closer look at your investment statements to check the fees you’re paying. What may seem like a low monthly fee can quickly add up, and high fees will erode your net returns over time.
While you’re checking out your investments, it’s a good idea to see if your portfolio is still in line with the original proportions you first established – in other words, if your ‘asset allocation’ is out of whack.
The sharemarket falls seen in March may mean your portfolio’s weighting to shares is below your target level. This is a problem that can easily be solved by drip-feeding funds into the asset classes that you are underweight in. It’s a way to avoid triggering a capital gains tax liability on the sale of investments you are overweight in, while also giving your portfolio the benefit of dollar cost averaging.
This process of rebalancing is like a spring clean for your portfolio. And the end of the financial year can be a good time for the job as it can provide opportunities to manage tax on your investments. If you cash in any poor performing investments in your portfolio, you may be able to offset the losses against capital gains on those assets that you’ve sold for a profit. As always, it pays to talk to your tax professional for tailored advice.
Paul Clitheroe is Chairman of InvestSMART, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
Tax time is ideal for reviewing your investment portfolio because it involves going through your financial records, which can help you assess how well your investments have performed and identify any high fees that may be eroding your returns.
To check if you're paying too much in investment fees, closely examine your investment statements during tax time. Look for any fees that seem low monthly but add up over time, as high fees can significantly impact your net returns.
Asset allocation refers to the proportions of different asset classes in your investment portfolio. It's important because it ensures your portfolio aligns with your financial goals and risk tolerance. Regularly checking your asset allocation helps maintain the desired balance, especially after market fluctuations.
You can rebalance your investment portfolio without triggering capital gains tax by drip-feeding funds into underweight asset classes. This approach avoids selling overweight investments, thus preventing capital gains tax liabilities while benefiting from dollar cost averaging.
Offsetting capital losses against capital gains can reduce your taxable income from investments. By selling poor-performing investments at a loss, you can use those losses to offset gains from profitable sales, potentially lowering your overall tax liability.
It's a good practice to review your investment portfolio at least annually, such as during tax time. Regular reviews help ensure your portfolio remains aligned with your financial goals and allows you to make necessary adjustments in response to market changes.
If your investment portfolio is out of balance, consider rebalancing by adjusting your asset allocation. This might involve adding funds to underweight asset classes or consulting a financial advisor for tailored advice on achieving your target allocation.
Consulting a tax professional is important because they can provide tailored advice on managing your investments' tax implications. They can help you navigate complex tax rules, optimize your tax strategy, and ensure compliance with regulations.
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