2019 Was a Great Year for Investors. How Should You Invest Your Money in 2020?

Lisa Brown, CFP®, Partner and Wealth Advisor, Brightworth

What a year: 2019 is in the books and many investors experienced strong investment results. The Standard & Poor's 500 Index finished 2019 with gains of over 31% including dividends -- its strongest performance since 2013. With 2020 upon us, some investors are wondering if the market rally will continue or if a pullback is looming -- especially in a presidential election year.

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While many people are concerned that the 2020 election could put the brakes on stock prices, the market's track record is strong. In five of the past seven presidential elections, the U.S. stock market has produced positive returns.

However, history does show us that it's unlikely the 2020 stock market will enjoy results similar to 2019. The S&P 500 has only experienced two consecutive years of double-digit returns five times in the past 20 years.

Given this scenario, what is an investor to do?

Here are four actions to take that can help investors manage fluctuations in the stock market in 2020:

Review Your Investment Portfolio Now

With recent large gains in stocks, many people now own portfolios that are heavily weighted -- maybe too heavily weighted -- in equities. For example, if you prefer a mix of 60% stocks and 40% bonds, gains by Apple, Microsoft and other technology companies in 2019 could have easily pushed stocks much higher than 60% of your portfolio.

Consider rebalancing your investment account so stocks are back to your ideal target range. This can be done by taking some of the gains from your stock returns and redeploying those funds into bonds, real estate, cash or other parts of your portfolio.

To Save on Taxes, Sell Your Losers

Investors with taxable brokerage accounts can offset some gains by selling individual stocks that performed poorly and lost money. Some department store stocks, such as Kohl's and The Gap, were down double digits in 2019. By selling or "harvesting" these losses, investors are able to offset taxes on both gains and income. The security that is sold can be replaced by another stock, maintaining an optimal asset allocation and expected returns.

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Keep in mind that stocks owned less than 12 months will incur a higher short-term capital gains tax than those stocks you've held more than 12 months, so look at your purchase date before selling any stocks you own in taxable brokerage accounts. On the other hand, because there is no tax on stocks that have appreciated as part of 401(k) and 403(b) plans retirement plans, as well as deferred compensation accounts, investors have more flexibility to sell winners and reinvest those funds.

If You Need Money Soon, Do This

Investors who need to withdraw money in coming years to pay for major expenses, such as college tuition, a vacation home or their retirement, should look carefully at how aggressively invested that money currently is. A good rule of thumb is to place funds needed for large expenses in the next one to two years in a bank account instead of investing it.

Even mid-term cash needs could become more conservative now. For example, if you own a 529 college savings plan and your child is in high school, consider dialing back the risk in the fund by moving some money into bonds, cash or other safe investments.

Retirees Should Continue to Own Stocks

With many bank accounts and certificates of deposit paying less than they were a decade ago, retirees have looked to other investments for income, including bonds and dividend-paying stocks. Many retirees will enjoy a longer retirement than their working years, spanning several decades, where inflation becomes a risk that must be addressed. As such, stocks will continue to play an important role in a retiree's portfolio.

For many early retirees, a portfolio consisting of 50% to 70% stocks works well, especially for those with cash set aside to pay for their living expenses for two years or more. For older retirees, dropping the stock mix to 30% to 40% of their total investments is reasonable, because they will need income for a shorter period and face less chance that inflation will erode their purchasing power.

Another year where equities jump 30% or more would please most investors. Rather than hoping for another strong year, instead use your 2019 gains to make strategic short- and long-term decisions that fit your own financial goals.

See Also: 8 Questions to Ask Before Making Any Investment

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