What a year! Now what?

Jan 2015

So, we are at the beginning of the New Year, and it is time for everyone to reflect back on 2014. This is that great time to do that final 2014 “housekeeping” for your portfolio and get ready for 2015.

By now you have probably noticed that your capital gains for the past year are a bit higher than you expected if you are a mutual funds holder. After years of market run up, many mutual fund managers have decided that this is the year to divest of many of their underperforming stocks, or stocks that have reached value targets at these new high levels. Get rid of the old and bring in the new. The problem for you is these capital gains are disbursed to shareholders. So if you have not noticed yet, take a look and prepare.

This is also a good time to take a look at your asset allocation. How did your asset allocation work out for you last year? Are there any changes or “tweaks” you want to make to it for this coming year, or do you feel comfortable enough with your strategy going into 2015? This gets really tricky this time of year because you may feel influenced by all those lists. Seems like everything I look at has someone’s opinion of the BEST INVESTMENTS OF 2014. Those are the lists that you typically look at and say “darn, I missed that” or “who would have thought to invest in that”. If you look beyond this past year, most of these investments had a horrible track record and, as an intelligent investor, you would have never picked them. Some may have even been on a prior years WORST LIST. However, at the end of the day keep in mind that you are looking at a 2014 list, so don’t be swayed to change your allocation or investment choices based on these lists. Past performance does not always guarantee future results, so the regulators remind us to tell you. If you really feel that one of your fund managers are really letting you down when you compare them to their respective index and peer group over an extended period of time (remember, a manager does not always hit it out of the park every year, especially calendar year), then look at making a change. I am typically looking at how they are doing over a three to five year time frame.

You should also rebalance your account to get things back to your asset allocation targets. Keep in mind, sometimes it is good to look at rebalancing more than once a year. Let’s reflect back at a few of this year’s highlights and you will understand why. We started the year with the Emerging Markets performing really well and around the same time, the US Small Cap market was really getting hit hard. Now, if you follow the rules of “buy low/sell high”, keeping that long term focus, and rebalanced your accounts around the middle of year you would have sold those excess returns from Emerging Markets and added to your US Small Cap positions. If you did that then those extra shares of US Small Cap would have continued working hard for you through the end of the year when US Small Caps came back from being down over 10% to being in positive territory at the end of the year. At the same time, you would not have given up as much of those gains in the Emerging Markets after they came off their highs and look like they could close slightly negative for the year. It is events like this that illustrates why disciplined rebalancing is a good thing for an investor. I say disciplined because it is always hard to tell your brain to sell something that is doing really well and buy something that is struggling. We are just not wired that way.

The moral of this story, evaluate your needs, review your plan, and stick to it. For long term investors, the best place to have your money is in the market. Most important, if you are having hard time doing this on your own, ask for help from a professional advisor.

Have a happy and profitable New Year!!

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