Sometimes, even our best-laid plans can go wrong.

Think about that first backpack you get your young child when she starts school. The straps are the perfect size, the design on the bag is her favorite character, and the bag fits everything she needs for her school day. It’s perfect! Fast forward a few years, and the straps are tight, she no longer likes the character that adorns her bag, and the backpack isn’t big enough to hold all of her school books. The bag hasn’t changed, but her needs have. It’s time for a backpack overhaul.

The same thing can happen with our investments.

The best portfolios are built with diversified, low-cost, high-quality funds, and are designed to meet the particular goals, timeframe and risk profile of the investor. But investments aren’t static, and neither are our lives—just like with the backpack example above. It is not unusual that the investment portfolio that was so well-designed initially no longer meets the needs of the investor. In that case, an overhaul of some or all of the portfolio is needed.

A great way to approach this is to look for the “why?”. Are the existing investments bringing below market returns, or drifting from their original purpose and balance? Has your risk tolerance changed? What is the money for, and when might you need it? How is the portfolio fitting in with the rest of your financial and life picture? Identifying why a change is needed will help to determine what the appropriate change looks like.

Once you are ready to make the change, you’ll want to consider the tax ramifications. Retirement accounts can generally be overhauled without creating a taxable event as long as funds stay inside the account, so that usually means that you can make whatever changes you need to without any strategy around timing or using tax offsets. That keeps it simple.

Meanwhile, selling assets in a taxable investment account will trigger either taxable gains or losses. While that doesn’t make your overhaul any less important—having a proper portfolio is very important—it means that you need to be more strategic in your implementation.

Most likely you’ll be doing a partial overhaul, meaning that some of your existing investments will remain while others will be replaced. I suggest that you look for the funds that are of the lowest quality and sell those first, and then replace them with high-quality assets that meet your updated goals. If you have any funds that have lost money, you might consider selling those to offset your gains elsewhere. That can even include high-quality funds in that sale, assuming you can identify a good replacement fund for your portfolio.

The beginning of the year is actually the perfect time to start your overhaul. Any taxes triggered by the sale of appreciated assets generally don’t come due for 15 months, until your tax deadline on the following year (consult your professional tax advisor to confirm your specific circumstances). Plus, you’re starting the year with an updated, efficient portfolio, which is going to feel good.

Remember that short-term capital gains, which are on assets held for less than 12 months, generally are taxed at higher rates than long-term capital gains on assets held for at least 12 months. Be mindful of that distinction before you sell anything, because it can have a large impact on your tax bill.

How ever you choose to keep your portfolio in tip-top shape, invest smartly and invest well!

Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.