Refresh Your Financial Life: Your Portfolio

When the calendar turns over, millions of Americans may look back on 2009 as the year they froze like deer in headlights—and made money by standing still. Since the market bottomed out in March, some who sat on their hands have done surprisingly well. As of today, an investor with all her stocks in an S&P 500 index fund would be up a healthy 20 percent for the year—and more than 60 percent since March. The government, meanwhile, has thrown money at consumers in the form of tax rebates and the Cash for Clunkers program, and beleaguered homeowners in cities like Dallas and Denver have even seen a rebound in real estate prices. Add such unexpected good news to the paralysis that comes with financial uncertainty and it’s clear why many people have stayed on autopilot. Of the 3 million customers with retirement plans at Vanguard, for example, the company says 89 percent made no moves in their portfolios, none at all, in the first nine months of this year.

But as a strategy for the future, sitting still may turn out to be, well, so 2009. Even the most upbeat pros doubt that a do-nothing approach will produce more miracles for the average investor. This year’s stock rally was the biggest since the 1930s; you might see Halley’s Comet before you see another year remotely like it. Indeed, bond guru Bill Gross recently told fund shareholders that the market could look anemic “for the next 10 years and maybe even the next 20.” The housing markets aren’t expected to deliver any windfalls, and taxes seem poised to rise. That means sticking with the old ways won’t help anybody stay ahead of the recovery. And most people know they can’t afford to do nothing: According to a survey by the Employee Benefit Research Institute, only 13 percent of workers are confident they have enough money for a comfortable retirement.

But most people are still wondering where to start. After all, the strategic landscape is both complex and shifting: Do the attractive yields of corporate bonds mean they’re replacing stocks as the anchor of a portfolio? Is it time to move retirement savings to a Roth plan? Does it finally make sense to invest in real estate? Today and for the rest of the week, we offer a guide to get you started on refreshing your finances.

Most people think of setting up a portfolio in terms of divvying up their cash among stocks and bonds. But a serious crisis like last year’s can hammer stocks and bonds simultaneously, and veteran financial planner Harold Evensky of Coral Gables, Fla., says most investors made one big mistake before and during the crash: “Picking investments that didn’t diverge.” So the pros are paying more attention to “alternative assets” that do diverge—that is, they tend to do well when stocks struggle. These include mutual funds that invest in commodities and precious metals, and others that use stock-price options to hedge their other investments. While these assets have yet to grab a slice of some people’s investing pie chart, planners like Evensky suggest that they should make up anywhere from 5 to 20 percent of a portfolio.

Most of the rest of that portfolio, of course, will still be in stocks and bonds. But when it comes to those old standbys, many of us need to break bad habits we learned during past bull markets. Consider that, 18 months ago, a quarter of Americans aged 56 to 64 had 90 percent of their 401(k) funds in stocks—one major contributor to the huge collapse in retirement accounts during the crash. To be sure, many pros still think younger investors should load up on stocks in their retirement portfolios, ratcheting them to as high as 80 percent of their holdings if they can stomach the risk. But most folks north of the big 5-0 should never be more than 70 percent weighted in equities, planners say, and it behooves them to get closer to 50 percent as retirement approaches.

The lessons of the financial crash and the limping pace that many analysts foresee for the U.S. economy have changed the calculus of which stocks and bonds to buy. With stocks expected to rise at only a single-digit annual pace for the near future, many experts are advising clients to focus more heavily on stocks that pay dividends—regular cash payouts—to their shareholders. And in the name of capturing growth in other parts of the world, planners like Dave D’Amico, president of Braver Wealth Management in Newton, Mass., recommend that as much as 30 percent of any investor’s stock holdings go into foreign stocks, including companies in emerging markets like Brazil and India.

The bond game has changed too, as more and more investors decide they’re ready to accept lower returns in return for avoiding the seesaw volatility of stocks. At one point late this year, bond mutual funds were drawing new assets from investors at a rate 20 times faster than stock funds, according to the Investment Company Institute, a financial-services industry group. But bond buyers seem to come in two flavors: the bold and the cautious. More aggressive investors have gravitated to riskier corporate junk bonds because of the higher interest yields they pay, starting in the 8 percent range. Others have been clinging to safer bonds that pay less but are also less likely to see their prices drop, including government bonds like TIPs, whose returns go up when inflation rises. Which route is right for the rebooting investor? Many planners suggest that clients use higher-yielding bonds for money they won’t need for a few years, like retirement funds; for money they’ll use soon, the more milquetoast bonds are the better move.

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