Don’t Start 2024 Without Making These Crucial Investing Moves First – The Motley Fool

Heading into 2023, the sentiment surrounding the stock market wasn’t the most positive, as many Wall Street analysts and economists anticipated a potential recession and continued downturn from 2022. Thankfully, that wasn’t the case, and the stock market had one of its better years in recent times.

Now that we’re in 2024, there’s no way to predict how the stock market will behave, but investors can make a few moves to help ensure they begin the year on the right track.

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1. Make sure your portfolio still aligns with your goals and risk tolerance

Investing isn’t (and shouldn’t be) a one-approach-fits-all game. Different people have different financial goals, retirement horizons, resources, and risk tolerance, so what works for one person may not work for the next person — and that’s perfectly fine.

Now that we’re in 2024, it can be a good time to do a portfolio review to ensure it still aligns with your personal situation. A good first step is to see how your stock portfolio is distributed across different sectors and stock types (growth, dividend, value). Once you know that, you can determine if your current investments suit you well.

For example, if your risk tolerance is low, but you’re invested heavily in growth stocks, you may want to begin adjusting that to include more conservative stocks. The opposite can be true, too. If you’re a ways from retirement and want to potentially capitalize on growth opportunities, you could increase your stake in growth stocks.

If your current portfolio doesn’t align with your personal situation, put a plan in place to rebalance it. Selling stocks is an option, but I generally don’t recommend that because it could spark an unwanted tax bill if you have capital gains. Instead, I would gradually buy stocks in underrepresented areas to achieve a more goal-aligned portfolio.

2. Check the overlap between your exchange-traded funds

In 2023, many megacap stocks saw their values surge, especially in the technology sector. But these rising valuations can be a double-edged sword. Let’s take the Invesco QQQ Trust ETF (QQQ -0.16%) and SPDR S&P 500 ETF (SPY 0.21%) — two of the most traded ETFs in the U.S. stock market — as an example.

Both ETFs are market-cap-weighted, so larger companies account for more of the fund than smaller companies. As megacap tech companies surged this year, they began accounting for more of these ETFs than usual. Notice that Apple, Microsoft, and Amazon are the top three holdings in each. Here are the percentages of assets both ETFs hold in those three stocks.:

Data source: ETF fund pages. Invesco QQQ holdings as of Dec. 27, 2023. SPDR S&P 500 holdings as of Dec. 28, 2023.

Many popular ETFs contain the same companies, so it’s important to monitor how much these companies overlap if you’re invested in multiple ETFs. You don’t want to be overconcentrated in any particular company or sector because it increases your risk if a downturn occurs.

Many online tools will let you enter which ETFs you’re invested in and give you a rundown of the overlap between them. Utilizing those can simplify the process and let you know if you need to focus more on diversification.

3. Commit to using a Roth IRA if you’re eligible

A Roth IRA is a retirement account where you contribute after-tax money and receive tax-free withdrawals in retirement. With a few exceptions, you can invest in virtually any stock or ETF in a Roth IRA that you could in a regular brokerage account. They’re essentially brokerage accounts with major tax breaks.

If you will be investing for the long term (i.e., retirement), using a Roth IRA is helpful because it could easily save you thousands in taxes when you sell shares or withdraw in retirement. The current capital gains tax rates are 0%, 15%, and 20%. For people in the 15% or 20% brackets (most people), using a Roth IRA over a brokerage account could mean saving $1,500 to $2,000 for every $10,000 in capital gains.

Roth IRAs have relatively low contribution limits compared to workplace retirement plans like 401(k)s — $7,000 for those under 50  or $8,000 if you’re 50 or older in 2024 — so I recommend aiming to max it out and then returning to your brokerage account. They also have an income limit, too. In 2024, any single filer making over $161,000 or married couple filing jointly making over $240,000 is ineligible to contribute to a Roth IRA.

If you’re eligible, take advantage of the Roth IRA’s unique tax break, and you’ll likely be thanking yourself later.