Get Your Portfolio in Shape for 2008

Manage Risk and Take Action

With your price targets in hand, you can now conduct the risk management part of your year-end investment strategy. This has two distinct objectives: estimating expected return and managing exposure. Hence, here are the questions to ask as you review the holdings in your portfolio:

Is your expected return worth holding your position? By comparing the price target for your stock with the current price level, you can calculate a price return for the coming year as follows: (Price Target divided by Current Price) minus 1 multiplied by 100 equals Price Return.

Last time, I covered benchmarking and performance measurment. Having set an investment performance benchmark, you can determine if you need to take action on an individual stock. For example:

My price target for Google is $850. The stock now sells for approximately $695. My return on the price target is 22% ($850 divided by $695 minus 1 multiplied by 100). If you expect the S&P 500 to rise 8% in 2008, then Google is a stock that you want to hold.

Conversely, I recently sold part of my McDonald's (MCD Quote - Cramer on MCD - Stock Picks) position at a price of $62.50 because the stock traded at my 2008 price target in December of 2007. The reason I did not sell all of my McDonald's shares is because I still believe that on a longer-term basis, the stock will continue to outpace my target and because of tax considerations (I felt no reason to pay 20%-25% income tax on a stock that I have nearly tripled in and would gladly repurchase if it fell 10%).

If your expected price return for risky assets falls below that of less risky assets, then you may need to consider changing your risk profile.

If that situation applies to you, then you need to eliminate some risk and get "defensive." Here are a few defensive techniques:

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