Asset Allocation Done Right

With the economy showing signs of life and the Dow topping 10,000, it's tough not to rush to your portfolio and try to wring all the good news you can out of it. Resist that urge.

That's not to say some tweaking isn't in order -- you'll certainly need to rebalance, if nothing else. But your approach to your portfolio should be as circumspect in good times (or at least better times) as it is in bad times.

"The tendency is always to think things are so dramatically different now, and there's a need to completely revamp your portfolio," says Glen Clemans, a financial adviser with Pearson Financial Group. "Every year people say 'this changes everything.' But that's rarely true. You need to step back, look at your plan. Review your asset allocation and determine if you're on track."

A good asset-allocation plan, after all, will inherently provide every investment with a hedge. And outside factors such as tax cuts might provide cause for some adjustments, but not a portfolio overhaul. (For more on structuring a good asset-allocation plan, click here.) With that in mind, though, here are a few things you ought to consider.

Rebalancing act. Your portfolio is almost certainly out of whack given this year's run-up in equities -- particularly in technology. If you -- or your funds -- own a number of tech stocks that have more than doubled in price since January (Research In Motion (RIMM), Yahoo! (YHOO) and National Semiconductor (NSM), to name a few), you're likely considerably overweight in technology. Then it is time to trim it back to your initial allocation before disaster hits ... again.

Dividend delirium. President Bush's new tax law cut the tax rate for qualified stock dividends to a flat 15% (prior to this law, stock dividends were taxed at your ordinary income tax rate). This has prompted planners to essentially look at dividend-paying stocks as something of a new asset class -- one that investors would do well to carve out a place for in their asset-allocation plan. "Not only does the reduced tax rate make the dividends more attractive," says Birmingham, Ala., financial adviser Stewart Welch III, "but the greater interest in these stocks will benefit the share price."