The first Christmas decorations you see in the shops should start you thinking about your shares. What’s the connection? It’s that the year-end is a good time to take stock of your portfolio, to re-consider your investment strategy and if necessary, dump any losing stock-holdings.

No portfolio – especially that of a self-managed super fund (SMSF) – should ever be considered a ‘set-and-forget’ proposition. A share portfolio that is not being regularly reviewed is not going to do its job – of creating wealth – properly.

A regular thing

Investors need to review their portfolios regularly, and be prepared to interrogate each stock as to whether it is still worth its place. You should re-assess your stocks at least twice a year – or quarterly, or even monthly, depending on how hands-on you want to be.

The calendar year-end is not as important in this process as the financial year-end, because that is the all-important tax year-end. But the same considerations should apply. When reviewing your portfolio, you should be prepared to lock in a gain from a good performer, or to cull a loser. But every time you sell a stock, you should do it in the way that produces the best tax results.

Too often, investors only think of the tax aspect of their portfolios in May-June, when they come to prepare their tax returns. But doing a half-yearly performance audit, with an eye to tax, can ease the pressure. As always, the prime consideration is using capital gains and losses to your advantage.

If you buy and sell within a year, capital gains tax (CGT) is levied on the entire capital gain at your marginal tax rate. But if you’ve owned the shareholding for more than a year, personal investors are only taxed on half the capital gain. (The discount does not technically apply to your tax rate: it is a discount on the gain taxed.)

A self-managed super fund that is in ‘accumulation’ phase, with a tax rate of 15%, earns a one-third CGT discount if it holds an asset for more than 365 days. Subsequent sale of the asset incurs CGT at 10%, unless the asset has been transferred into the pension account of the fund, at which point the tax rate on income and capital gains from the asset becomes zero.

Use loses wisely

But even if you sell at a share at a loss, the loss can still be handy to your tax situation, because capital losses can be offset against capital gains. Nobody likes making a capital loss on a share, but using it to negate the tax on a capital gain that you’ve (hopefully) earned elsewhere in your portfolio is a perfect way to ease some of the pain. Rather than complaining about shares that have fallen in value, investors can at least use this situation to reduce their CGT liability.

Capital losses can also be carried forward for use in later years. When you make a capital gain in future years, you can deduct your loss from the gain.

The key to using your capital losses strategically in this way is to know exactly when you bought each ‘lot,’ or parcel of shares. When using a capital loss to offset a capital gain, it’s a good idea is to use that loss to offset a capital gain on a stock that you’ve held for less than 12 months — where you pay CGT at the full rate — rather than the discounted CGT. That way, you get the full value of the loss offset.

Many SMSFs have built their income strategy around tax-effective dividend income from shares, but they can’t afford to ignore the potential for volatility of actual share prices. If a stock looks to be markedly over-valued, that can justify locking in a gain.

The favourites

However, with the S&P/ASX 200 having traded sideways over the last 12 months, there is actually not much in the way of gains and losses in the most popular SMSF stocks to work with.

CBA is up 9.9%, and appears fully priced – it has moved to 0.5% above its FN Arena consensus target price – but that has to be set against the 5.2% expected FY15 yield, which is worth 6.3% to a SMSF in accumulation phase, and 7.4% to a pension-paying fund.

ANZ is up 5%, but sits 8.4% below its FN Arena consensus target price; Westpac is up 4.7%, but has 5.1% implied upside to its below its FN Arena consensus target price.

Telstra has delivered a total return of 18.3%, and has moved above its consensus target price. Given that Telstra has doubled since mid-2011, many funds would have made a capital gain on Telstra, but they have to ask whether they want to forego the 5.4% estimated FY15 yield.

In contrast, BHP has lost 14% over the last 12 months, and Rio Tinto has shed 5% – which will not come as a surprise to anyone, given the tumbling iron ore price in 2014. But anyone contemplating using those capital losses has to factor in that on FN Arena consensus target price, the pair show implied upside of 31.7%% and 30.2% respectively – meaning it might not be a good time to sell.

A whole portfolio view

It is not only tax that an investor should be thinking about as they assess their portfolio over the Christmas holidays. Diversification and asset allocation are also important: have gains in any section of their portfolio altered the asset allocation picture, and made their portfolio too concentrated in one stock or sector?

In contrast, are there any stocks you want to add to the portfolio? With markets volatile – and plenty of concerns, both geo-political and economic, being aired about 2015 – a dollar-cost averaging strategy could be useful, to build a shareholding slowly.

With trading typically much lower over the Christmas holidays, market moves can be exaggerated. The US market typically enjoys a “Santa Claus rally,” and recent years have delivered on that front, and that usually slingshots the stockmarket into the New Year on a high.

However, that is by no means set in stone. But if you use the holiday period wisely to assess your portfolio settings thoroughly, you can feel good about the New Year, regardless of what the market brings you.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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