Midyear Investment Strategies

Savvy investors monitor their portfolios all year long. Here are some adjustments to consider now.

need a helping of stocks.

Steele, for example, has 75% of his portfolio in the stock of his former employer, AFLAC. "At some point during my time at AFLAC, I started getting stock options," says Steele. "Unlike some of my co-workers, I kept the stock. I didn’t buy boats or cars with it. And it appreciated a lot in the 1990s."

Letting the stocks grow enabled Steele to retire in his early 40s. Now he spends his days with his wife; 7-year-old daughter, Ariel; and 11-year-old son, Warren III. His overweight in equities should help him stay ahead of inflation while he isn’t bringing in an income. Steele, however, will have to diversify his holdings in the event that AFLAC shares slide significantly. Having so much of his retirement savings in one stock leaves him open to tremendous risk. If that one stock fails, so do his retirement plans.

A healthy stock holding should be a mix of large, medium, and small companies and international stocks. Some stocks will be up while others will be down, thereby smoothing out the ride over the long term. Index funds are a good way to accomplish this goal. Look at Vanguard Total Stock Market Index (VTSMX; 800-662-7447) fund for domestic stocks and Artisan International (ARTKX; 800-344-1770) for international exposure. A low-cost, broadly diversified bond fund, such as Harbor Bond (HABDX; 800-422-1050), can supply your bond fix.

And don’t forget about cash. Experts say a cash reserve of six to nine months of living expenses in addition to your retirement savings is necessary. This way, if you’re hit with an emergency, you won’t have to sell your investments. "I would say that you should be saving 10% to 15% of income, in addition to what you’re doing in your 401(k)," says Gwendolyn Kirkland, a financial planner with Kirkland Turnbo & Associates of Matteson, Illinois.

REBALANCE YOUR PORTFOLIO
Once your asset allocation is in place, stick to it. If you intend to have 20% of your portfolio in bonds, make sure you are staying within that range by rebalancing at least once a year. Neglecting this chore for even a few years can put
your portfolio terribly out of balance. Over the last five years, bonds have returned a cumulative 41%, while stocks posted a 15% loss. As a result, many people now have a higher percentage of their portfolios in bonds than they intended.

Take some time to make adjustments if your portfolio balance is off. "When you rebalance, what you’re essentially doing is selling high and buying low. That’s the crux of the strategy," says Osbourne.

Identify the best performers in your portfolio. Likely candidates will probably be real estate, commodities, and bonds. Prune profits from these holdings so they equal your desired allocation, and add the proceeds to categories that haven’t fared as well, such as large-cap growth or technology.

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