Finance and Savings Do's and Don'ts in 2016

Do' s and Don' ts of Finance in 2016

Money moves to make — and avoid — in the new year

Getty Images When it comes to financial investments, stocks, annuities and savings, plan to make the best money decisions in 2016. New Year’s Day typically marks the end of the holiday season. It also marks the time of year when we contemplate all the ways we want to improve in the coming year to meet our goals - including goals. Though in listing our resolutions we may tend to focus on improving our health and appearance and how many trips to the gym it will take to get there, it’s the perfect time to get our financial life in shape as well. Luckily, one of the best personal finance writers around, Jonathan Clements, added a host of Do’s and Don’ts for 2016 in his book, Jonathan Clements Money Guide 2016. I recently spoke with Clements about a few of the most important items on his list that you should consider.

The Do s

1. Hold a fire drill! Imagine that your have lost 30 to 50 percent of their value, says Clements. I’ll pile on and add that your bond funds also lost 20 to 30 percent as you wanted to get more yield by investing in riskier bonds. How would you feel, and what would you do? Clements suggests you go back to your 2008 and 2009 investment statements to see what you did back then. He says that it’s much better to take risk off the table while stocks are near an all-time high than after a plunge. It’s not that either of us expects a crash next year, but crashes often happen when we least expect it. It’s better to have a balanced portfolio during all markets — and accept that we don’t know the future.

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as an AARP member. 2. Go overseas. Clements notes that adding foreign stocks to a portfolio can seem risky but can actually reduce risk, and he says you should have 30 to 40 percent of your stock portfolio in international stocks. I agree from a diversification strategy, and a total international stock index fund is my vehicle of choice. 3. Go for the gold. Ever the contrarian, Clements encourages investors to consider gold stocks or low-cost funds that own gold and precious metals and mining stocks. Despite this asset class having been badly beaten up over the past few years, it’s unlikely the whole precious metals and mining industry will go bust. Everyone was recommending these stocks when they were hot several years ago. I agree with Clements here, but only for those brave few who have the stomach to take such ultra-volatility. However, keep the allocation to well under 5 percent of your stock portfolio. See also: 4. Lower the amount you have in traditional IRAs and 401(k)s.Clements notes that leaving large inheritance amounts in these vehicles can also leave large tax liabilities for your heirs. Today, though, your heirs can withdraw the funds over their lifetimes (stretch IRA). Proposals have been made, including one in President Obama’s original 2016 budget, to end the stretch . If such a proposal ever does pass, taxes could be owed much sooner. Putting money away in IRAs and 401(k)s is a good thing but, in retirement, if your tax bracket is low, it may be time to take money out before you have to. You could take out the funds to live on or through conversions.

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The Don ts

1. Don’t trade index funds. Not only do index funds tend to outperform actively managed funds, they are very tax-efficient because there’s very little trading of securities within funds. Yet selling an index fund eliminates these advantages, often resulting in a tax bill if sold at a gain. Not only is Clements right on this point, but studies indicate that the more we trade, the worse our results. 2. Don’t chase yield. Déjà vu all over again as high-yield bonds (aka junk bond funds) are down right now, and some have crashed. One such bond fund recently blocked investors from getting their money back. should be boring and act as your portfolio’s shock absorber. 3. Don’t overweight growth stocks. These are the high-flying, rapidly growing companies that are the darlings of Wall Street. Though over the past five years growth stocks have outperformed the rest of the stock market, research reveals that the slow-growing stocks (known as value stocks) have actually outperformed in the long run. 4. Don’t worry about estate taxes. We all want our heirs rather than the government to get our money. To counter that latter possibility, we might spend a lot to craft complex plans and buy expensive products to get money out of our estates. Clements notes that each of us will have a $5.45 million estate tax exemption in 2016 ($10.9 million for a married couple), and 99.8 percent of us are below this threshold. As you make your resolution list this year, consider your financial health and these Do’s and Don’ts, as well as the many other critical suggestions in Jonathan Clements Money Guide 2016. I live and breathe , yet I always learn from Clements, and this book is no exception. Financial health is important because it brings with it the freedom to pursue what you want in life. So here’s to a happy, healthy and wealthy 2016! Allan Roth is a financial planner based in Colorado Springs, Colo. He writes a weekly online personal finance column for .

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