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Need a Portfolio Tune-Up?

Four tips for investors

Jason Raish illustration

In a world that tracks movements in financial markets second by second and feeds news to the masses like there’s no tomorrow, it’s easy for individual investors to get caught up in the story of the moment. But advisers say some investors take the headlines too seriously, and as a result make investing moves they may later regret.

Groups such as the American Association of Individual Investors say that the best way to keep your feet on the ground is to develop a solid financial plan and an appropriate allocation of investing assets, then keep a careful eye on the portfolio and ignore the “noise” of the daily news. Here are four pieces of basic advice.

1. Go long.

Short-term trading may be best left to young people who will have time to recover from bad financial decisions but, in fact, rapidly moving in and out of the stock market isn’t a good practice for any investor, regardless of age. Market volatility poses inherent risks in both stock and bond markets, and the potential for big price swings always lurks around the corner.

The best way to avoid market news-induced queasiness is to have long-range goals. Whether your mission is to afford a good retirement, fund a college education or build a trust that can bring value to your heirs down the road, set a dollar target and a timetable for reaching it. You can find an abundance of good, free advice online, including many calculators that will help you arrive at an appropriate investing goal.

Once you have a dollar figure, you can determine the annual rate of return you need in order to reach the goal. And you can use the return rate to help identify an appropriate mix of investments, such as a diversified mutual fund portfolio.

Keeping your eye on your annual return target will not only help you stay on track, but will also help you put daily market headlines in perspective.

 

2. Don’t short your 401(k).

Qualified retirement plans can not only enhance your investing power by deferring taxes on annual returns, but may also reduce your current taxes. Yet a surprising number of people fail to fund their plans to the maximum amount allowed by law.

Individuals who qualify can this year contribute up to $18,000 to a 401(k) and knock $18,000 off the top of their income for tax purposes.

If your employer offers a matching program, you have an added incentive to fund your 401(k). The law allows employers to match an employee’s contribution up to a total of 4 percent of the employee’s salary. If you have access to such a program and don’t fully fund your account, you’re leaving “free” money on the table.

 

3. Allocate wisely, stay the course.

As investors set their long-range goals, they should decide on an appropriate allocation of their money among stocks, bonds and cash. Again, online investment sources offer plenty of advice, based upon your age and life circumstances. A 25-year-old with stable income, for instance, may opt for a somewhat aggressive portfolio that’s 60 percent in stocks or stock mutual funds, 30 percent in bonds or bond funds and 10 percent in a money market account.

A person closer to retirement age, on the other hand, may choose a more conservative allocation, such as 65 percent bonds, 25 percent stocks and 10 percent cash.

Once you determine the allocation, you should monitor your overall portfolio at least on a quarterly basis and make adjustments when needed. If you have decided to keep 45 percent of your portfolio in stocks, for instance, and a particularly good quarter for equities pushes the value of your stock holdings above 50 percent of your total portfolio, you might consider shifting some money out of stocks and into bonds to bring the allocation back into balance.

Focusing on the end goal and allocation target can help investors avoid mistakes, such as being tempted to sell investments as soon as the market shows volatility. It is a sure-fire bet that the stock market will at some point deliver unsettling news, but if you’re prepared and confident in your portfolio, you needn’t succumb to the jitters.

 

4. Get a zero-percent tax rate.

Since it’s tax-filing season, here’s a tip that could benefit some investors in the current year. It is a tax code provision that allows for a zero capital gains and dividend rate for certain situations. The provision applies to investors whose taxable income – after all applicable deductions and exemptions – is below the top of the 15 percent tax bracket. The threshold figure varies according to the taxpayer’s situation, but in 2014 the top of the 15 percent bracket was $73,800 in taxable income for married couples filing jointly.

For those who qualify under this provision, any long-term capital gains and dividends received during the year will go untaxed. People who are near that threshold may want to take steps to keep a lid on their taxable income. Coincidentally, that’s yet another good reason to fully fund your 401(k).

 

Online Help

Investor basics: The American Association of Individual Investors aims to provide unbiased investment education. Current offerings include a guide to personal tax planning. Visit aaii.com to get started.

Mutual fund investing: The Vanguard Group Inc., a well-known provider of low-cost mutual funds, is one of many companies that offer a wealth of online help. Visit Vanguard.com for basic advice, online calculators and help in setting targets.

Investing for college: CollegeSavings.org offers state-specific information about college savings plans, a calculator to figure future college costs and much more.

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