5 Key Investment Tips for 2023

H. Jeffrey Spivack MSc, CFP®, AAMS®, MPAS®

Do you need to refocus on your goals and update your long-term financial plans? 2022 has been a year of volatility, with headlines moving markets on an almost daily basis. Now is the time to find out if the market revaluations have de-railed your retirement plans.

Here are five key activities investors could do right now to prepare for what might lie ahead in 2023.

1. Take Advantage of Market Volatility in 2023 for Potential Benefits in 2023 and Beyond

The following are practical investing strategies to implement, if appropriately planned.

• Roth IRA conversions Consider whether now is a good time to convert individual retirement accounts (IRA) to Roth IRAs. With a traditional IRA, contributions are tax-deductible and withdrawals are taxable upon retirement. Contributions to Roth IRAs are not tax-deductible and withdrawals may be tax-free. How and when you might get a tax break from investing in an IRA could make a considerable difference when market valuations are depressed.

• Tax loss harvesting Systemic market losses in 2022 might provide offsets against future potential gains. This is a strategy that could lower taxes by selling an investment at a loss and using that loss to offset taxes owed on another investment sold at a profit. Taking a tax loss now could benefit your investment portfolio next year.

Recently in October, the IRS increased the contribution limit for employees who participate in 401(k), 403(b, most 457 plans and the federal government’s Thrift Savings Plan from $20,500 to $22,500.

Additionally, the limit on annual contributions to an IRA increased from $6,000 to $6,500. This catch-up contribution limit is for individuals aged 50 and over is not subject to annual cost-of-living and remains $1,000.

TIP: If leveraging tax loss harvesting, be careful of wash sale rules. Wash sale rules prevent taxpayers from deducting losses on a sale of stocks or securities that are subsequently replaced within 30 days.

• Gifts, trusts, and estate planning Some opportunities to make gifts to charities or to trusts might be available only through 2025. The estate and gift tax exemptions received through the Tax Cuts and Jobs Act of 2017 are scheduled to expire in 2026. Consider the benefits of making gifts while these exemptions still exist.

• Cash low If you do not follow a budget or do not know how to construct a cash flow statement, ask your advisor for help, in the context of financial planning. The objective is to identify ways to invest surpluses during good years (where they could benefit you in coming years) and to make sufficient funds available during periods with deficits. This process, using either ‘dollar-cost averaging’ or ‘value-based averaging’ techniques, could help to reduce your cost bases for enhanced participation in market recoveries.

TIP: If you have savings programs that purchase securities, consider increasing your monthly contributions to acquire more shares at a less expensive price. This might serve to decrease cost bases and improve returns, over time.

• Debt management and impact The long-term impact of carrying debt could be significant, particularly from inflation-sensitive debt (e.g., credit cards, adjustable mortgages). An advisor could help determine if one of the following strategies might reduce or eliminate debt when developing your strategic financial plan:

  - Snowball method: Pay off loans with the smallest balances first, then progress to higher-balance loans, afterwards.

  - Avalanche method: Pay down debt with the highest effective interest costs first. Consider those with variable rates and balloon payment triggers, their timeline, and relevant loan provisions.

  - Cash flow method: Use surplus cash to make additional principal payments to reduce balances and, ultimately, interest costs.

2. Evaluate your asset allocation and your asset location relationship

Asset allocation and Asset Location are separate techniques that can benefit your long-term portfolio returns, and each might be out of alignment due to 2022 market volatility.

•  Asset allocation is a strategic investment planning technique that determines an optimal mix of asset classes (e.g., equities vs. fixed income vs. annuities vs. cash). Once deployed, your mix should not be adjusted without considering whether risk objectives have changed or whether market volatility has simply led to temporary anxiety. Do not be tempted to shift a strategic allocation because of current market volatility. Instead, talk to your planner or advisor about tactical shifts within your allocation that may help to blunt the impact of market volatility.

TIP: Fixed income yields and returns might not currently look attractive. However, investors should consider the value of buying bonds because of the potential tempering effect fixed income instruments might have on a portfolio’s return-to-risk ratios.

• Asset location is a tactical investment planning technique designed for an investor, potentially, to keep more of what they earn after taxes. Once an asset allocation is chosen, the asset location determines how that strategy (e.g., 60% equities/40% fixed income) is deployed for the potential benefit of the investor (e.g., optimum % of equity and fixed income choices within taxable, tax deferred, and tax-free accounts).

TIP: If an asset allocation change is recommended, either as a strategic move (an adjustment to the overall mix of stocks-bonds-cash) or as a rebalance (a return-to-recommended-strategic balance), re-establishing the right asset locations should be considered.

3. Incorporate your employer’s benefits open enrollment period into your financial planning exercise

The objective is for you and your financial advisor to ascertain how you could make the most use of your employment benefits package.

• An example might be to supplement your employer-provided long-term care insurance with another policy for increased coverage. Likewise, you could acquire additional disability coverage or life insurance to improve what might be offered by an employer. 
• Notify your accountant and attorney about what you are doing and why, so they are informed about your financial plans. If you are not familiar enough with the planning process, ask your financial advisor to speak with both.

4. Consider a family financial plan

Many people might have financial responsibilities for parents or children who reside elsewhere. Consider how you could work with these family members to meet their needs.

• Plan for an emergency fund comprised of liquid and non-volatile securities such as cash/cash equivalents. Your emergency fund should cover 3-6 months’ worth of expenses and your planner can help you to create a savings program to build and maintain your emergency fund against future needs.
• Some investors consider the use of a home equity line of credit (HELOC) or the ability to take out loans against retirement plan balances as a potential source of emergency funding. These asset sources should be considered last in priority. HELOCs tend to become permanent costs and retirement plan loans could become a problem should the plan require paying off outstanding loans if your employment status changes.

TIP: Estate planning might change dramatically in 2025. 2023 could be an excellent opportunity to make changes over a two-year period instead of waiting until 2025. Please consult with your advisor and/or planner to see if the potential tax code changes could impact your current plan.

5. Find the right financial solutions tailored to your goals

There are a variety of potential answers to complex financial planning questions.

•  Learning some of them might be the easy part. Determining whether these solutions are right for you and your family could be a challenge. Wisely investing your time and money to determine the appropriate direction to take now, could pay off next year and beyond.
• One way to receive sound guidance is by working with an experienced and knowledgeable advisor. Engaging a certified financial planning (CFP®) and advisor today into a financial planning conversation is another good tip for 2023.