Investor’s New Year To-Do List

It’s January, and that means time to prepare for the year ahead in your investment portfolio. At least once a year or so, and January is a good time to do it while you’re probably in that kind of mood, you should spend some time on portfolio management.


One of the main principles of portfolio management is diversification. That means having some funds invested in each of several different asset classes. How much is invested in each one is something that must re-examined periodically.

Notice that I said different asset classes, not just different assets. Ebay stock and Home Depot stock are different assets, but they are both stocks – the same asset class. Stocks go up and stocks go down, but to a large extent they do whatever it is together.

Note, that anything that wraps around baskets of stocks, is still stock. This would include:

  • Stock-based mutual funds (i.e. most mutual funds)

  • Stock-based ETFs

  • Collective investment trusts

  • Stock-based closed-end Funds

  • Variable annuities and Variable Life insurance policies

All these things have to be counted as stocks.

Stocks are a wonderful thing. As a class, they have the highest long-term average rate of return of any asset that we can invest in passively. But over short periods (anything less than ten years), they can show losses. Because of this, no number of different stocks can make a truly diversified portfolio. We need to allocate some of our funds to other things as well.

Those other things could include bonds, preferred stocks, precious metals, real estate, foreign currencies, cash in the bank or insurance products like fixed and indexed annuities, among others. It is important to have assets that will not go down in value when the stock market does, because sooner or later, it does.

Some of the above assets also experience fluctuations in price, but not in the same cycle as stocks. We must make sure that we always have some assets that are paying us when others are not.

In our Proactive Investor class, we detail the process of deciding how much of our funds should be allocated to each asset and asset class. In broad outline, the idea is that the more time you have until retirement (or other future date when you will need to draw down your investments), the more you can afford to allocate to stocks; and conversely, the shorter that time horizon is, the more you must allocate to investments like bonds, cash and other items with limited market risk.

Since that time horizon changes each year, portfolio management isn’t a set it and forget it activity.



Even if there are no life changes requiring rethinking of overall allocation, there is another related reason for spending some time on portfolio management. That is re-balancing your assets due to differences in the past year’s performance.

Here is an illustration: Suppose that in your overall allocation last year you decided that 60% of your money would be invested in stocks, 10% in gold and 30% in bonds. You made your dispositions accordingly. With a $100,000 portfolio, that would be $60,000 in stocks, $10,000 in gold, and $30,000 in bonds (not a recommendation just an example).

This year, you analyze your situation and decide that those same percentages are still a good plan. Even though the plan is the same, changes are still required to account for the last year’s results.

Let’s say that each of the asset classes has had a year like 2017.    Stocks returned 23%, bonds paid 5% and gold went up by 12%. Your numbers now are:

Stocks:  $73,800

Gold:     $11,200

Bonds:   $ 31,500

Total:   $ 116,500

Congratulations! That was a very good year. But to restore each asset class to its planned percentage allocation, some changes need to be made. Stocks are now 63.3% of your new portfolio total. You’ll need to sell about $3900 worth of stocks to get them back to 60% of the new total. The $3900 in cash that you raise by selling stocks then gets reallocated to each of the other assets so as to bring them back to their planned percentages. In this case, that means buying $450 more of gold, and $3450 more in bonds (plus investing the interest earned on the bonds in more bonds).

By re-balancing in this way, you have taken money off the table from your stock wins, and socked it away in the other assets. Next year, or the year after that, stocks will go down while one or more other assets will have gone up. Then the same type of re-allocation will reverse the flow. You will then be buying more stocks – but at a lower price. This re-balancing, in the long run, results in buying assets low and selling them high. And that’s what we want to do.

The time you spend on portfolio management will help you lose less and earn more, and that is well worth the effort. I hope this brief outline has inspired you to examine your investing approach. Happy new year, and we hope you have a prosperous 2018.

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