Understand Your Benchmark When Markets Are Volatile

Markets have been volatile thus far in 2020, and you may be wondering how your investments are holding up. To gauge the performance of their investments, investors often turn to the Standard & Poor’s 500 (S&P 500) Index, which is widely used as a benchmark for the performance of equities. But is this the right approach?

The S&P 500 is not the only benchmark of investment performance. Designed to be a broad indicator of stock price movement, it consists of 500 leading companies in major industries chosen to represent the American economy. But the index has limitations. The S&P 500 tracks only a small percentage of the more than 5,000 stocks listed on the New York Stock Exchange, and it consists of primarily large-capitalization companies. But what if you don’t hold large-cap stocks? What if your portfolio is comprised of small-cap stocks or international stocks as well? In that case, the S&P 500 may not be the best benchmark for you.

There are other benchmarks. A bond fund might use the Bloomberg Barclays US Aggregate Index; an emerging-markets fund might use the MSCI Emerging Markets Index. If you invest in a mutual fund, your prospectus and quarterly reporting materials will likely indicate which benchmark your fund uses.

Know, though, that even if you are looking at the appropriate index, there are nuances you may not be aware of. For example, some indices are not equally weighted, so the strength of just a few popular stocks can boost the index’s return significantly.

That means it is important to find the right index and understand that differences in performance may be explained by differences in the composition of your fund versus the index.

Please reach out to me if you would like help understanding which benchmark is most appropriate for your investments.

Is Now a Good Time for Investors to Take Capital Gains?

As much fun as it is to watch an investment gain value, it is a drag to pay taxes on that appreciated investment. There are strategies, however, that will help you minimize capital gains taxes, but timing is everything. Here are some tips for deciding if now is a good time to take capital gains.

Have you held the investment for at least a year? The taxes you pay on your gains are determined by how long you hold investments in your portfolio before selling them. Gains made on assets that you have held for less than one year are taxed at your regular income tax rate; gains made on assets that you have held for one year or more are taxed at 0%, 15%, or 20%, depending on your tax bracket.

Can you use capital losses to offset capital gains? If you have a losing investment in your portfolio, you might want to sell it and use the loss to offset gains. If you have $5,000 in capital gains, for example, and you take a $5,000 capital loss, the two will cancel each other out. Additionally, if your annual losses exceed your annual gains, you can use the excess to offset your ordinary income, up to $3,000. And if you still have a net loss after that, you can carry $3,000 a year to future tax years.

Another option: consider investing in a low-turnover mutual fund that seeks to invest in a way that minimizes capital gains.

Can I help you find a low-turnover fund? Feel free to reach out