If you’ve received a bonus or expect one soon, you have a rare opportunity to leverage it to build greater wealth. This Insight will discuss some recommended practices and explain why the annual bonus season is probably the best time for investors to assess their progress toward financial plan goals and reassess the overall investment objectives and asset allocation structured to achieve them. This review enables investors to develop a more disciplined, objective way to allocate the proceeds from the bonus payment.

Look at liquidity

We recommend first assessing short-term liquidity needs and determining if current holdings are ample. This provides a better sense of how much of the bonus can be used for longer-term investment. The guidelines used to assess ample liquidity for both everyday needs and emergencies should be carefully reviewed to avoid forced liquidation of long-term assets at inopportune times.

After completing this assessment and refilling liquidity coffers if needed, investors should next consider using bonus funds to pay down or pay off any high-interest-rate debt. Loans with lower interest rates, particularly if the interest is tax-deductible, can be maintained if the expected return on the assets invested exceeds the after-tax interest cost.

Investors should also remember the importance of tax efficiency and asset location when placing the bonus proceeds. Maximizing a contribution to the company’s 401(k), including the catch-up provision if over the age of 50, can take some of the tax sting out of the bonus. In addition, investors should consider opening or contributing to a Roth IRA if they are under the 2026 income limits.

Consider long-short equity strategies

After funding their tax-deferred accounts, investors should focus on tax-efficient investment strategies for the remaining taxable investment dollars, which could comprise the bulk of the bonus. Of course, municipal bonds are highly tax-efficient fixed-income vehicles that should be strongly considered for the more conservative portion of an investment portfolio. There has been growing interest among taxable investors in direct indexing and long-short extension strategies in the public equity markets. While perhaps less well known than municipal bonds, these separately managed equity portfolios look to match or exceed established benchmarks while harvesting losses to maximize the after-tax total return. (Learn more in our Insight, “Tax-Aware Investing with Long-Short Equity Strategies.”)

These strategies can be customized to the amount of leverage the investor would assume and the benchmark against which the portfolio will be measured. Because they are subject to account minimums, they should be considered part of the overall financial plan and portfolio structure to which the bonus proceeds will be added. Your financial advisor is your best resource in helping to determine which, if any, of the above strategies are appropriate for your personal situation.

Don’t chase market trends

In conjunction with reviewing the investment objective and subsequent asset allocation goals, investment of bonus proceeds is an opportune time to rebalance a portfolio to the longer-term asset allocation. While this may appear to be a basic concept, double-digit equity returns in each of the last three years have surely increased the equity allocation meaningfully above the original allocation. While gratifying to experience these outsize returns, it may be tempting to allocate the bonus more aggressively to the asset class that has provided such recent gratification. This is known as trend chasing, a concept where investors are influenced by recent news, events, and experiences. When investors overweight the importance of recent events—whether bullish or bearish—they are more likely to chase performance than to make sound strategic investment decisions. When we feel good during a bull market, we tend to add money near the market peak.

Portfolio rebalancing, or bringing the portfolio back in line with what is expressed in an Investment Policy Statement, can often help add to returns or lower volatility. But perhaps the greatest benefit of portfolio rebalancing is not financial, it’s emotional. It’s the idea that rebalancing, when implemented on a consistent basis, instills a sense of discipline into an emotionally charged world. After all, rebalancing requires us to do what is emotionally uncomfortable but financially productive. Think about it. Rebalancing requires the investor to reduce their exposure to assets that have done well recently and redeploy those assets into securities or asset classes that have done less well.

Enjoy your bonus

While we have concentrated on investing the bonus proceeds, shoring up your financial foundation, and planning for longer-term growth, let’s not forget about setting aside a portion of the bonus as a reward to enjoy or give to others. Although discretionary bonuses have come to be expected in the total compensation package in many industries, the concept of a bonus implies something extra for a job well done. Spending a reasonable portion of the bonus on fun things or experiences makes it feel like a true reward for hard work and success. After all, you’ve earned it!

Some people may prefer to invest in themselves through professional certifications or learning new skills, while others may find more satisfaction from donating a portion to a charity that aligns with their values. A key element for many sophisticated investors is having a professional advisor with deep experience in wealth and investment management to guide them. Reach out to your Cerity Partners advisor or request an introduction today.

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