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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

A Portfolio To-Do List for 2014

December 29, 2013

There’s nothing particularly special about the month of January when it comes to planning your finances for the year, despite all the talk about the January Effect. Still, the beginning of a new year is as good a time as any to get your investment portfolio in order and to take care of a few housekeeping items.

If you sold stock in December to claim capital losses on your 2013 tax return, you may be sitting on more cash than you would normally like to have. But even if you haven’t made a single portfolio move, you may have a year’s worth of accumulated dividends and interest payments to invest, and — particularly after big year in the stock market like 2013 — you’re probably due for a regular portfolio rebalancing.

Let’s go over two basic “portfolio tune-up” ideas for January.

IRA / Roth IRA Contributions

If you are still saving for retirement, you might as well get your 2014 contribution to an IRA or Roth IRA out of the way. And if you haven’t made a contribution for 2013, there is still plenty of time — the deadline isn’t until April 15.

For tax years 2013 and 2014, the contribution limit for both traditional IRAs and Roth IRAs is $5,500 — with the option to add another $1,100 if you are 50 or over. Watch your income levels though; you start to lose eligibility to contribute to a Roth IRA at adjusted gross incomes of $112,000 and $178,000 for singles and marrieds, respectively, in 2013. In 2014, the phase-out starts at $114,000 and $181,000, respectively.

IRAs — and particularly Roth IRAs — are the single best investment and estate-planning vehicle available to most Americans. As you sit down to plan out your year, make sure that you are taking full advantage of them.

Portfolio Rebalancing

Portfolio rebalancing can be a surprisingly controversial topic because it would seem to fly in the face of that sacrosanct trader’s maxim: “Sell your losers and let your winners ride.”

It may seem like I’m practicing Orwellian doublethink, but I’m actually a firm believer in both concepts.

Allow me to explain. Within your actively-traded stock portfolio, there is no reason to sell a stock simply because it has risen in value. If your investment rationale is still valid — and if the stock is still reasonably priced — then there is absolutely no reason to sell a stock that is performing well, particularly if it is paying a good dividend. Market-leading stocks can remain market-leading stocks for years … or even decades in some cases.

Rebalancing is more about divvying up your assets among asset classes — stocks, bonds, real estate, alternatives, etc. And this is where the real planning comes into play.

The first step in executing a proper portfolio rebalancing? Forget everything you think you know and throw all rules of thumb out the window.

If I sound like I’m being harsh, hear me out. The standard rebalancing models are woefully simplistic and generally only take into account one factor: your age. The most common “rule” is that you should subtract your age from 100 to find your “ideal” stock allocation. So, if you are 60 years old, you would ideally have a portfolio split 40/60 between stocks and bonds. In a nod to lengthening lifespans, newer guidelines suggest subtracting your age from 120. So, a 60-year-old would have a targeted allocation of 60/40 stocks/bonds.

There are two big problems with this line of thinking: It is completely insensitive to market valuations, and it says not a word about what matters most to retirees — regular income. And as a secondary problem, it assumes that all retirees have the same time horizons, which is obviously not true.

Here is my advice for intelligent rebalancing. First, do what pension funds do: Match your assets and liabilities. If you want to buy a retirement home or have a child or grandchild you intend to help through college in, say, 5 years, keep the funds you have earmarked for those expenses in CDs or bonds with a five-year maturity.

For the rest of your funds, the decision gets a little more complicated. The age-based rule is a nonstarter for one critical reason: Bond yields are still pitifully low, and bonds are overpriced relative to stocks and most other asset classes. No matter what you age, having a large allocation to an overpriced asset class is terrible financial planning.

Still, keeping something in the ballpark of 4-5 years’ worth of basic living expenses in a bond ladder is reasonable advice. If the stock market takes an unexpected swoon, you could sell down the bonds and live off the proceeds without having to sell your stocks at depressed prices.

With the remainder of your portfolio assets, consider a diversified mix of dividend-paying stocks, REITs and Master Limited Partnerships. Ideally, you would be able to supplement your Social Security or other pension income with a steady stream of dividends and would not need to dip into principal.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

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