Year-end Cleanup Tips For Your Portfolio

By Xavier Brenner

With 2014 winding down, it's time to give your portfolio (and financial adviser) a thorough performance review.

It's been a volatile year with rising geopolitical risks in Ukraine and the Middle East, slowing growth in the Eurozone, China and Japan and a big downturn in energy prices.

So how did your manager navigate these choppy waves? What portfolio cleanups need to be made?




Here are some year-end tips to fortify your investments for 2015.

1) Alpha

You can't know where you are going without knowing where you've been.

So, if you really want to a nuanced view of how your money manager fared, check your portfolio's alpha.

This is a statistical measure of an investment's risk-adjusted performance compared to a benchmark, such as the S&P 500.

It's one of the best indications around of how well your financial adviser or portfolio manager performed against the overall market and what level of risk he or she is taking.


2) Play defense

Your portfolio comes up short? You might want to reconsider whether the investment lineup in is well-suited suited to current market conditions.

The present bull market run will turn five in March of 2015 and it's already the fourth-longest rally since 1928.

This doesn't necessarily mean ripping up the entire game plan and starting over.

However, the end of the year is a good time to consider cutting loose losing positions for tax reasons and making mid-course strategic adjustments.

When markets are volatile, money managers will often shore up their portfolio's defensive fortifications by increasing exposure to companies with steady earnings and an above average dividend payout ratio.

On top of that, you may also want to reconsider your strategy for energy-sensitive holdings heading into 2015.

The current swoon in oil and gas prices is great for airlines and petrochemical companies, but not so great for oil and gas companies.


3) Dollar cost averaging

On the flip side, there may be positions, even depressed ones, that you want to expand or entirely new ones you aim to open up in 2015.

If the current volatility spills into 2015, ask your adviser if he or she will employ dollar cost averaging when buying investments.

In choppy markets, buying stocks or other investments at regular intervals in fixed dollar amounts helps shield your portfolio from price swings.

For instance, let's assume you are bullish on Apple (AAPL) over the long term and want to invest $2400.

Rather than make that trade in one fell swoop, it might make sense to spread that lump sum over 12 months if you have a long-term perspective.

From month to month, that $200 will get more shares (or fewer shares) depending on fluctuations in Apple's share price.

However, you may end up with a lower overall average per share price over 12 months with dollar cost averaging.


4) Diversification

If your portfolio is underperforming, it may not be diversified enough for the current market environment.

As a general rule, no one stock holding should make up more than 5% of one's overall equity portfolio.

Ask your advisor if your stock portfolio has a broad enough exposure across different industry sectors, geographies and market capitalizations.

The same goes for fixed income investments.

Aim for a broad mix of fixed income investments with varying maturities, markets and sensitivities to interest rate changes and inflation fluctuations.


5) Correlation

Given the current market volatility, it may be wise to focus on the correlation characteristics of the portfolio.

In the investment world, correlation is a measure of whether two investments head in similar directions or diverge.

A measure of 1, means both assets move perfectly in lockstep in the same direction. A reading of negative 1 signals the investments move in opposite directions.

Portfolio managers aim for a mix of investments that are uncorrelated or tend to behave differently depending on market conditions.

It's a smart way to protect your overall return when markets swing wildly. Ideally, gains in one part of the portfolio will offset losses elsewhere.

Take the time to clean house and recalibrate your investment goals and strategy.

No portfolio is perfect and a few well-considered tweaks may make a difference as we head into 2015.

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DISCLAIMER: While Covestor does provide limited investment advice to its clients, the content herein is provided as general and impersonalized investment information and is not a recommendation or solicitation to buy or sell any security. Past performance is no guarantee of future results.
Bill DeShurko

Bill DeShurko

401 Advisor, LLC is a registered investment adviser based in Centerville, OH. Bill DeShurko founded 401 Advisor, LLC in 2003