Further Thoughts on Repositioning a Portfolio

Because of the volume of positive comments from my last column, I wanted to share some additional repositioning strategies if you are inclined to move funds in this volatile market. First, let me reiterate that selling after you have lost may not be the best move - - often it's not. Better to be diverse and not so aggressive than to fall big and then try to sell. But for those who may have taken a bit too much risk and want to pull some money off the table, here is some further food for thought:

1. Compare how much you have lost in each investment from 1/1/08 to present with the S&P 500 index for the same time period. If your investment has fallen more than the index, perhaps selling is a mistake. Why? Let's assume your investment lost 15% year to date compared to an 8% loss in the S&P 500. If you'll rebuy back into another equity type of investment, then essentially you are selling at a 15% discount and rebuying into an area that is likely down about 8% - - that's a 7% deficit. You'd need to decide whether you felt comfortable taking a 7% hit.
If your investment hasn't fallen as much as the market, then count yourself lucky and consider whether to ride out the storm OR sell it and invest in something that has fallen even further. The idea would be selling low, but buying into something even lower.

2. If your investment is something more aggressive (or materially different) than the S&P 500 index, also compare your investment performance to the comparable index. If it is acting similar or better than the index, likely there is nothing really wrong with the investment and you just have to decide whether the volatility is something you can stand. Often your time horizon has a lot to do with holding or not. If your investment is performing worse than the index, you might consider cutting your losses.

A good example of this strategy could be applied to the real estate sector. Real estate is an area of the market that institutional investors and large endowment managers routinely hold for the long term because it typically moves independent of the stock market. Returns in this area weren't exactly great last year on the index, although many individual holdings faired pretty well. Year to date, many losses match about what the general market has lost. Therefore, if your sector or your investment holding is something you would likely hold onto for a long period of time and today it just happens to not look so hot, then perhaps holding through the volatility is warranted, assuming this only represents a slice of the portfolio. If the slice has gotten too big, then perhaps cutting some of your losses may be in order.

3. Stay away from sector investments that are too narrow. Sectors can be an excellent way to enhance returns in a difficult market, if you bet right. But trying to be so specific (i.e. buying a single country fund or gold or steel) can get you into trouble because these type of areas are more volatile - good and bad. Even putting a large percentage of the portfolio in one area that is broad can be still be dangerous. Better to limit the percentage you put in any one sector and be sure that the sector can cover lots of areas if you are feeling queezy these days. As an example, if you like the idea of investing in gold but know you are buying at a high in gold prices, consider a precious metals or general commodities investment that hits all sorts of areas and let the manager work out the details.

4. Use dollar cost averaging to your advantage. One potential way to win back losses in a falling market is to sell a portion of assets to cash and reinvest back a portion into those same investments (assuming they were sound in the first place) over a period of weeks or months. You earn interest on the cash and get to buy at lower prices if you are right and the market falls. The only catch is if the market turns up, then you buy higher.

If you are uncomfortable in today's market, it might mean you didn't have the portfolio positioned right in the beginning. Seek wise counsel. Listen for two or three trusted opinions who know your specific situation. Every case is different and unique and the above strategies are not meant to solve every situation for a nervous investor. They are meant to stir up further questions to help you decide on the best course of action.

Repositioning Your Portfolio After You've Lost Money?

The last month in the market has been no picnic. It often raises the question - Is it too late to sell and reposition after I have already lost money?

It seems contrary to sell out at a loss just to get the portfolio in a better position for the next time the market experiences a correction. Why not wait until the portfolio recovers, then sell and reposition? The question is not easily answered but there are a couple of lines of thought that one should consider.

First, never discount the possibility of further loss. Just because you might be down 10-15% from the last few months does not mean you cannot fall further. Big losses are what kill the values of our portfolios. The recession of 2000-2002 proved that well enough. If you think we are facing some more hard times ahead and you are not happy with your portfolio, you need to think hard whether you can withstand more losses. Remember, when you lose 50%, it takes 100% to get back to even. If you are in investments that are volatile, then you really have to evaluate when this repositioning should take place. If now, even after a 10-15% market correction, then so be it. You might save yourself further loss.

Second, evaluate if there is a chance that the economic circumstances or the management style might recover. If so, perhaps waiting to sell and reposition is the answer. It is pretty amazing how volatile the market can be on the smallest piece of news. For instance, the market may surge up and give us a one day wonder when things like the Fed lowering interest rates or oil dropping far off that $100 mark happen. You might gain 2-4% in a single day if you are watching. That could potentially provide just the opportunity to sell and reposition.

What would my answer be today? My thoughts are that the economy has slipped pretty dramatically to the downside in the last 3-4 weeks. Most people expect a rough six months in the market, so cashing now and repositioning would admit defeat (i.e. you would take your 10-15% loss) but the move might shelter you from further erosion. I hate to sell low as much as the next guy, though, and might see if I could evaluate my more volatile positions and move those around at opportune big market positive days.

There has been a lot of selling of late. Perhaps even with the downward pressure on stocks and selling there might be windows to recover some, sell, and reposition on a good market day. Splitting the difference and selling some positions now and waiting on others could work just fine.

The other advice I might have for those wanting to reposition is to put a portion of the proceeds immediately back to work in the newly restructured portfolio. This way, if the market does decide to head up (and we were too pessimistic in our outlook), you should get upside. Also, dollar cost average back a portion back into the market over time so that if the market falls further, you will continue to have some of your funds buying at these low prices. If you are aggressive, perhaps the dollar cost averaging should be just on more volatile holdings. If not, moving in money each week or so for the whole portfolio is probably the safer bet. You may miss some upside, but you will experience better buying if the market heads down further in the short run.

Every strategy is unique. It is always better to think about risk and understand how much you are taking before the market decides to go backwards, but better late than never!

New Years Goals for Young Professionals

Is it really worth sacrificing the rest of your life because you lived too high on the hog in your young years? As much as I love that Nickelback song RockStar and see so many Young Professionals living with similar excessive tendencies, many more people have found greater financial success by exercising fiscal discipline, especially in younger years. And what better time to evaluate priorities than a New Year!

For those of you interested - here's a great excerpt from the Nickleback song: I want a brand new house on an episode of Cribs and a bathroom I can play baseball in and a king size tub big enoughf or ten plus me(So what tell me what you need?). I'll need a credit card that's got no limit and a big black jet with a bedroom in it. Gonna join the mile high club at thirty-seven thousand feet. [Chorus:] 'Cause we all just wanna be big rockstars and live in hilltop houses, driving fifteen cars. The girls come easy and the drugs come cheap. We'll all stay skinny 'cause we just won't eat. And we'll hang out in the coolest bars...Every good gold digger's gonna wind up there. Every Playboy bunny with her bleach blond hair. Hey hey I wanna be a rockstar.

It's hard to get past materialism. My comments will focus toward Young Professionals in this column because the habits they develop today can profoundly change their tomorrow. If you are or know a young person with potential, be sure to forward these New Years Financial Resolution ideas.

1. Only buy it if you can afford it. Society encourages big spending. We are taught that our lifestyle must include the latest cell phone, IPod, MP3, or electronic gadget - - or driving a new $40,000 car, spending all we want on vacations, parties, entertainment, and eating out. What ever happened to waiting to buy it until you can afford it? A typical 20-something cannot live like a typical 40-something or like a 20-something Britney Spears. Math doesn?t lie. You can either live the life of the rich and famous that Nickelback asserts and increase your chances of eventual self-destruction OR exert some discipline, start a savings program, and have piles of money later on. The richer you want to be, the more savings minded you need to while you are young. Forget what your friends buy or what your boss drives. If you go by the rule to buy only what you can afford, you will likely have much more for a longer period in the end.

2. Evaluate any debt you have or might incur in the next few years. Credit cards are not evil but they do become a problem if you cannot pay off your balance each month. Avoid high interest credit cards at all costs. On the flip side, low interest debt (like a mortgage) can be quite useful. Some financial experts suggest paying cash for everything because all debt is bad. While this is a good theory and keeps people out of trouble, I would encourage Young Professionals to look deeper at their debt picture. For instance, if you purchase a home at an interest rate of 6% but after the tax break you only are paying 4%, why make a large down payment at purchase or make double house payments? Either could be invested. If you could make 10% on that money and only pay 4% on the mortgage, it seems to me you are pocketing 6%. The catch is you can?t consistently make 10% without some risk.

3. Add a savings for future consumption account to your monthly budget. This savings fund is a liquid account designed to pay big-ticket or non-monthly items instead of having to go into debt or running short on cash when these big bills come up. The first step to establishing such a fund is to determine how much is spent on non-recurring monthly items like vacations, home repair (or home fund), car repair, or medical costs. Quicken has a great program to track all your expenses and really get a handle on where each dollar actually goes. Once you see your non-monthly expenses, go ahead and deduct the amounts you will eventually spend on these type of items and move that amount to a savings account. When it comes time to spend, you?ll have the funds.

4. Save money in your 401K or similar retirement plan as soon as you can and raise the amount you save every year. Contribute at least as much to any employer plan that they match ? it is free money! Consider implementing a Roth IRA, which will give you tax free money on the back end, which counterbalances a good bit of the taxes you will pay in retirement from those employer pre-tax retirement plans. Not only do you get the long term tax benefits, this gets you saving more and more on a monthly basis. Make a goal to invest a certain percentage of any bonuses or salary changes as well.

5. Determine what financial things you want short and long term and re-look at your savings plan. Perhaps instead of saving all money to a 401K or to a house fund, you might do a little of both. I hate to see people save all their money toward a home purchase, when that little extra savings only compounded over the few years until purchase doesn?t substantially reduce the monthly payment. Whereas investing the same into a retirement fund that compounds for 30 years makes a much larger difference down the road. Think about making financial progress in 3 different areas: short term (today?s expected and the unexpected stuff), medium term (what you want in 5-10 years) and long term (retirement) - - and balance them all.


If you are dedicated and disciplined to save now, you have a much better chance of attaining and sustaining that richer lifestyle later.