Making Year End Adjustments to Your Investment Portfolio

December 19, 2008 by  
Filed under Investing

If you are an investor still contemplating whether to make adjustments to your asset allocations in your investment portfolio, you are running out of time.  We have only a few trading days left in 2008.  You may be looking to harvest some tax losses.  That shouldn’t be hard to do.  You could probably randomly throw a dart at a list of your stock and fund holdings and hit a loser.

On the other hand, maybe you have some long-term winners remaining in your portfolio.  If you fall into this category, we hate you.  (Sorry, my investor envy got the best of me there.)   Anyway, if you own any stock or fund that is a candidate for taking your gains, 2008 may be a better time than 2009 for doing it.  After the Obama team gets through pushing out the $1 trillion stimulus package next year, they will re-visit the question of how to pay for it.  Higher capital gains taxes for at least some taxpayers is one likely candidate.  It’s just too bad for a tax-happy Congress that so few of us will have capital gains to tax. 

Moving on to a couple of year end investing thoughts from Mr. ToughMoneyLove …..

Municipal Bonds

This is a scary time for holders of muni bonds.  There are several reasons why municipal bond funds lost value in 2008.  The outlook for 2009 is not much better.  The reason is that so many state governments are operating with budget deficits, some of them frighteningly large.  Here is a list of the states with the largest fiscal gaps in their budget.  The winner is Arizona, with a 30.8 % budget gap.  Maybe the Arizona state government could persuade all of those Sun City retirees to go back to work for the state and then not pay them.  They are retired after all.  Coming in second with a 30.3% budget gap (representing a $30.6 billion shortfall) is California.  No surprise there except that Arnold ran for governor as a fiscal conservative and now look what he has done.  I’m thinking that he and George Bush were reading the same guide on how to craft and implement a budget.  Unfortunately, I’m also thinking that they bought their how-to budget guide from an infomercial.

OK, back to municipal bond funds.  If you own any funds that concentrate in muni bonds from a single state, check the list for how badly that state is positioned budget-wise.  Then consider dumping that fund for something more diverse or get out of the muni bond sector entirely.  As some commentators have stated in some of my earlier posts on muni funds, the Obama team may be preparing to implement federal backstops for state and local government bond issues.  Until we know that for sure, watch out for one or more state government budget crises to emerge, crashing their respective muni bond values.

Stocks in a Deflationary Economy

Based on what happened in 2008, is it possible for any stock sector to do well in 2009, with deflation and maybe even a depression staring us in the face?  Mr. ToughMoneyLove thinks it’s possible although I’m not exactly bullish about it. 

First, consider companies that will benefit from an increase in government infrastructure spending, e.g., bridge and road construction and repair.   A lot of government money is headed their way in 2009.

Also consider businesses that would gain from an anticipated push in retrofitting existing government and commercial buildings with energy-saving equipment.  Energy-efficient lighting and lighting control systems come to mind.

Manufacturers of health care products should also do OK, particularly if they sell stuff that baby boomers will be needing in increasing numbers, including pharmaceuticals and replacement parts for our aging joints.  (Yes, that was a serious recommendation.) 

I would consider stocks and funds focused on discount retailers a safe play.  I’m speaking about Wal-Mart of course but also discount grocery chains.  They have become quite popular with food shoppers at all income levels.

Lots of people choose education over unemployment in a down economy.  This means that some of the well known for-profit education businesses could see a steady flow of tuition money, even as publicly funded colleges go broke.  Catering to older adults with evening and weekend classes seems to be the key there.

Finally, don’t forget about companies that make gaming devices and lottery supplies and equipment.  Believe it or not, hope for the big score eternally springs out of despair over a bad economy.  The cynical investor would capitalize on this.

Income Investments

Interest rates have fallen again.  Treasuries have approached the negative yield zone.  Money market funds may soon follow.  What is an income investor to do?  Call me crazy, but I’m staying with I-bonds.  Bonds purchased now will yield 5.6% (tax deferred) through April 2009 before the rate adjusts.  I also like the inflation protection for beyond 2009.  Granted, I-Bonds are not for very short term cash holdings but there are other places to put those monies.  Maybe your mattress?

So those are Mr. ToughMoneyLove’s thoughts on year-end portfolio adjustments.  What are yours?

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5 Responses to “Making Year End Adjustments to Your Investment Portfolio”
  1. Matt SF says:

    Good thoughts here. For short term income and cash reserves, I would suggest folks checkout for banks paying outrageous rates for “rewards checking accounts”. I’m in a bank paying 6% APY w/ a 25k maximum balance, and all I have to do is swipe my debit card 10x a month and setup 1 bill pay transaction.

    A hedge fund report was released a few weeks ago showing they were forced to liquidate mass quantities of muni bonds. Apparently, these were the backbone of their portfolios that permitted such insane leverage ratios and forced selling.

    As for sectors, I like generic pharma and home based healthcare companies. Riskier plays would be any industry that has government backing and bailout protection… certain financial stocks come to mind here.

  2. Drew says:

    I like Defined Risk Strategies. They provide a lot of protection on the way down, and privide income generating opportunities in most market conditions.

  3. kitty says:

    Good thoughts.

    I’ll need to take a look at my stocks and decide what adjustments I want to make.

    I took some calculated risk with very small amounts of money. E.g. I bought 150 shares of Citigroup at $5.25 – I was sure the government wouldn’t let it fail. One day before $3-something bottom, but still low. Also 100 shares of GE at $13.

    “This is a scary time for holders of muni bonds”
    Yes, but if you are willing and can afford to take risk and buy individual bonds rather than funds (to have an option of holding to maturity rather than just be totally dependent on current bond values) there is a good chance for pretty high returns especially for those of us in higher tax brackets and living in high tax states. I did take a risk and bought a couple of NY issues for 10K (of coupon value) total – one AA issue and one AAA for the tax free coupon rate of 5% and 5.25% coupon rate respectively. I bought slightly below par, so the yield to maturity is around 5.3%. Certainly, with all the job losses in NY state there is risk, but I live in NY and the idea of tax free income was too good to miss. Since I am perfectly willing to wait till maturity if need be (although I am ready to sell if it seem to make sense), I don’t worry as much about current bond values, but of course I worry about the default. Both issues are relatively long term so NY doesn’t need to repay them for a while. At worst they may miss a couple of interest payments. Historically the default rate on AA and AAA municipal bonds is very low even in the worst of circumstances, but of course past performance is … .

    I also took a calculated risk on corporate bonds and bought an issue on Goldman Sacks bonds -5K value, but as it was below par, it cost me about $3700. YTM of 9%. Again, it is a risk, but I am taking risks every day with stocks, and while GS is likely to have difficulties, I don’t believe it’ll default on its bonds. If I am wrong I’ll lose money.

    I may buy more bond issues in the following months – to diversify and also because the yields are so attractive.

    Obviously, one needs to have money to invest in individual bonds. The minimum purchase for each bond is often 5K in bond value (you spend less if the bond is trading below par). Also, you shall be ready to hold to maturity if the bond value drops. Plus there is risk.

    “I am staying with I-bonds…”
    I was lucky in that I bought all of my I-bonds for 2008 early in the year when the fixed portion of the rate was 1.2%. Also, at the time I was able to buy the total of 10K in a year – 5K through treasurydirect and 5K at a bank. Now it is only 5K total in a year. I am not yet sure if I’ll buy earlier next year or hold off till later in the year for possibly better fixed portion of the rate.

  4. Matt: Great suggestions. I have been following the community bank accounts and plan on opening one myself.

    Drew: Can you tell us more about Defined Risk Strategies? I’m not sure I understand what you are referring to.

    Kitty: I hope your bond moves work out and certainly having the tax free income in NY is important. I am looking myself at some corporate bond issues and like you would want to hold something 3-5 years until maturity. As for the I-Bonds, I believe you can still buy $5k each online and in paper for a total of $10k. Have you learned something different?

  5. kitty says:

    “As for the I-Bonds, I believe you can still buy $5k each online and in paper for a total of $10k. Have you learned something different?”
    I remember getting an e-mail from treasury direct back last April or May saying that they reduced the limit to 5K total. On the other hand, today I looked at their web site to double check and it mentions 5K via treasury direct and 5K in paper. At the time there was also a sentence about it on their web site, but now there is none. Maybe the wording was bad and it wasn’t what they meant or maybe they changed their mind. I’ll try to find this e-mail I got from them last year.

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