How To Tweak Your Retirement Portfolio For 2014 Market

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Special Report: Race To Retirement

Talk about scary. Last year, 81-year-old H. Burt Hiester's portfolio slumped 4%. Almost all of the loss came from the REITs he held. Aiming for dividend yield, the retired Cumberland, Md., insurance salesman focused on mortgage REITs. But that category lost 2% on average last year, according to NAREIT.com.

And that was during a great year for most investors, as the S&P 500 soared 32.39%.


So Hiester, who trades through TDAmeritrade, is on high alert for what's ahead because he knows that this year's market is supposed to be tougher and choppier. He's married, so his portfolio impacts his wife as well.

Adding to his concern, the Federal Reserve's ongoing tapering of bond buys looms like a guillotine over bond proxies such as his REITs. Ditto for the prospect of outright rate hikes at some point.

And the widely expected slow-growth economy is a head wind for the other big portion of his portfolio, royalty trusts invested in oil and gas production.

So Hiester, like millions of investors who are retired or planning for retirement, has grappled with how to tweak his portfolio this year. How should he respond to all of the question marks hanging over the market?

Investors using a proven individual stock strategy base buys and sells on the rules of their investment blueprint.

What about other investors? Investors relying on mutual funds? Do not zig and zag much, advisers urge.

If you've already got a target asset allocation, stick with it, says Judith Ward, a senior financial planner for T. Rowe Price.

If you don't have one, get cracking on one, she adds.

Your portfolio should be diversified. Your weightings in stocks, bonds, domestic and foreign, should reflect your goals, time horizon and risk tolerance, she says.

Rebalance once a year. And don't try to outfox the market. "If you're diversified, when the market does its (volatility) thing, you've always got something that does well and you're not depending entirely on things that are not doing well," she said.

What about hands-on shareholders who want to fine-tune their asset allocations? That's the sort of advice Lisa Emsbo-Mattingly gives fund managers at Fidelity Investments, where she is director of research for asset allocation.

Fed tapering and the prospect of higher rates is more of a hurdle for non-U.S. stocks and funds than domestic ones, she says. Be wary of emerging markets that have not taken steps to cut their trade deficits. Fed tapering and rate moves will make it harder for them to get financing. Their currencies risk being devalued.

Japan has similar problems. "Proceed with caution on Japan stocks and its trading partners," Emsbo-Mattingly said.

In contrast, Europe has taken its bitter medicine. "It's one of the most exciting places on a cyclical basis," she said.

The U.S. has largely adjusted to rising rates and Fed tapering so far. "Rate-sensitive parts of the economy, like housing, should benefit. Anything that uses debt, so the financial system, commercial real estate, residential real estate, consumer durables should benefit from this environment."

She would steer away from companies that export to emerging markets. "Companies in the commodity complex and energy will continue to see lackluster pricing and volume growth," she said.

In tech, Emsbo-Mattingly is comfortable with bets on strong players in mobility, the cloud and information technology.

She's wary of hardware and semiconductor names. "Semiconductors are a global cyclical, hurt by weakness in emerging markets."

In health care, she likes biotech leaders. "Historically, they love this low-rate environment," she said.

Eddie Yoon, leader of Fidelity's health care sector team, likes segments that should benefit from cost-cutting pressures, such as information technology firms that will help hospitals control costs. He also says the advent of low-cost gene sequencing will generate many new business opportunities over the next 10 years, just as the birth of the Internet did.

He runs $6.2 billion Select Health Care , which heldIllumina ( ILMN ), a leader in sequencing, as of its last disclosure.

In bonds, Emsbo-Mattingly likes investment-grade debt and Treasuries as a hedge against any shock that jolts equities.

Brian Burmeister, a Schwab Private Client portfolio consultant, also advises retirement-oriented investors to adjust their portfolios.

Those who already hold emerging-market stocks and funds that have declined should consider harvesting capital losses to offset taxable gains. "Then turn around and re-establish some positions to take advantage of low valuations, and do it in a way that avoids the wash sale rule," he said.

Likewise, this is the time to buy into emerging markets at bargain bin prices, he adds. "Demographically, that's where growth will come in the next few decades."

But beware of companies in the Fragile Five markets -- Brazil, India, Indonesia, South Africa, Turkey -- whose rate hikes and monetary reforms are too young or not yet begun, he says.

As for China, Burmeister urges caution until recent reforms prove their value.

Investors, especially in high income-tax states, should consider municipal bonds and funds for home-state and federally tax-exempt income. Prices were beaten down a lot last year, he notes.

And if your concern is volatility, then rebalance. "Harvest some gains from last year and rotate those proceeds into asset classes that underperformed, including bonds," Burmeister said.

Harvesting gains and restoring your target allocations among stocks and bonds, big and small, U.S. and foreign, taxable and tax-exempt, puts you back within your risk tolerances for each category, he says, adding, "That gives you the freedom to not worry about market movements."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Mutual Funds

Referenced Stocks: ILMN

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