Q: What financial housekeeping should investors tend to at year-end?

A:
Before December 31, investors should review their portfolios for any unrecognized gains and losses, because only $3,000 in losses can be deducted per year. “It’s important to rebalance the portfolio and realize gains to offset the losses you may have incurred in 2001,” says Harold A. Davidson, president of Harold Davidson & Associates, an investment counseling firm in Los Angeles. “You can carry over more than $3,000 indefinitely, but you can only deduct $3,000 in a given year.”

This year, minimizing on-the-books losses could mean selling more than just $3,000 in stock. “Many people have experienced a significant decline in their portfolios since the first of the year,” says Davidson, and thus have large losses to offset.

Investors may also want to buy large-cap stocks before December 31. Davidson urges substituting companies with larger market caps for small-cap stocks, because when investors consider the uncertainties in the current economy, they will more likely invest in safer, more recognizable large-cap companies that have a stable earnings pattern.

Another tip: Take care when buying mutual funds at year-end because they pay distributions from losses and gains in December, which means you could wind up with a significant gain — that you have to immediately pay taxes on — if you buy shares before distributions are posted, Davidson says.

Year-end is also a good time to clean out your filing cabinets, using guidelines from your financial advisor or accountant. And make sure you have copies of all vital investment information in your safe-deposit box.