Page 11 - Kiplinger's Personal Finance - November 2018

share. But the estimated price-earnings Portfolio Checkup
ratio was 22 for consumer discretion-
ary stocks and 19 for technology shares. REGAIN YOUR BALANCE
The higher the valuations, the greater
the risk if earnings growth disappoints.
Recall that both Facebook and Netflix The long bull market has left many investors with a nice problem: a lot of unrealized profits in
stocks. Over the past three years alone, through August, Standard & Poor’s 500-stock index
plunged close to 20% this past sum-
gained an average of 16.1% a year, compared with 9.5% annually over the past 15 years. The
mer on concerns about their growth
prospects. “It was a good reminder of hot streak means the portion of your assets in stocks, compared with other investments, may
exceed your risk tolerance. The solution is to rebalance your portfolio by selling an amount
what can happen” when market stars
of stock necessary to bring your stock portion down to a comfortable level.
disappoint, says Wander.
Many financial pros advise rebalancing once a year. Start by totaling up all of your stocks,
Some market veterans say it’s simply
bonds, cash and other securities. Include assets in retirement accounts and in taxable ac-
prudent to take profits in the stocks counts. If you own mutual funds that hold a mix of stocks and bonds (such as target-date
that have racked up the biggest gains.
funds), check the most recent fund report to see the breakdown of assets. Once all assets are
Jim Paulsen, chief investment strate-
accounted for, calculate the percentages in each asset type. (You can also use online services
gist at research firm Leuthold Group,
such as those offered by financial advisory firms Personal Capital and Betterment for this.)
suggests trimming Alphabet, Amazon,
Facebook and Netflix, among others.
Run the numbers. Say your calculations show you with 70% in stocks, and you want to bring
“Congratulate yourself and let some-
that down to 60%. You’ll have to decide how best to pare the equity portion. If your assets
one else have them,” Paulsen says.
are mostly in mutual funds held in a retirement account, such as a 401(k), it’s relatively simple
Strategists at Morgan Stanley are to shift a portion of your stock holdings into either bond investments or cash accounts, or
warning clients that global economic
both. The great advantage of rebalancing in a retirement account is that you won’t trigger a
growth could slow heading into 2019
tax hit. If the stock investments you want to trim are in taxable accounts, you may owe Uncle
because of rising interest rates, mount-
Sam a piece of your capital gains. Remember, though, that mutual funds must pay out real-
ing business costs—such as for raw ized gains yearly, so in a taxable account you’ve been taxed all along. That may mean your
materials—and trade tensions. The
tax hit from rebalancing won’t be huge.
firm sees the tech industry as a likely
Rebalancing is also useful among different types of stocks. For example, most foreign
victim of weaker growth and advises
stock markets have been weak performers over the past nine years compared with U.S.
clients to lighten up on the stocks. shares. If you think foreign issues may be relative bargains now, shifting some money from
But selling winners is one of the
U.S. to foreign stocks makes sense (see “How to Navigate Emerging Markets,” on page 59).
hardest decisions for investors, espe-
The goal of rebalancing is to lower your risk of severe loss
cially when a company’s long-term
by keeping your nest egg well diversified. “We know we’re
prospects still seem bright. Bulls say supposed to buy low and sell high,” says Liz Ann Sonders,
the high prices of tech stocks relative
chief investment strategist at Charles Schwab. “Rebal-
to earnings are justified by their long-
ancing doesn’t require you to time the market. You’re
term growth outlooks. Yet that was
just trimming strength and buying
the same argument put forth before into weakness.”
the 2000–02 tech-stock crash. After
that collapse, Microsoft (MSFT)
shares took almost 17 years to get back
to their 1999 peak—even though the
firm was highly profitable for the en-
tire period. It’s understandable if you
can’t bear to part completely with your
winners. But at least consider selling
a portion of the shares.
Investors whose stock holdings are
entirely in exchange-traded funds or
conventional mutual funds need to
look at what’s in those portfolios to
judge how much risk they’re taking
and which funds may be ripe for prun-
ing. One surprise may be just how
heavily invested you are in technology

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