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By Jason Stipp and Christine Benz | 06-26-2013 03:00 PM

Benz: A Second-Quarter Portfolio Checkup in 4 Steps

You're likely to see red ink in bonds and still-strong year-to-date performance in stocks when you check your portfolio after a rocky second quarter. Our director of personal finance offers tips for what to do next.

Jason Stipp: I'm Jason Stipp for Morningstar. As the second quarter comes to a somewhat rocky close, investors may begin to anticipate their quarterly statements.

Here to offer a preview of what you may expect in that statement and also some tips for your quarterly portfolio check-in is Morningstar's Christine Benz, our director of personal finance.

Thanks for joining me, Christine.

Christine Benz: Jason, it's great to be here.

Step 1: Assess Your Asset Allocation
Stipp:
You have a few steps here for a portfolio checkup, specifically for this quarter that's coming to a close now. Your first one is to assess your asset allocation, and you're paying attention at this point right now to stocks versus bonds. Stocks have been a little bit rocky in the second quarter, but year-to-date they've still done pretty well.

Benz: They have. So you want to do that X-ray with your portfolio using our X-Ray tool, plug your portfolio in and see how it's apportioned among the major asset classes. Chances are, if you've done nothing to rebalance your portfolio in the past few years, you probably are heavy on stocks relative to your targets--particularly if part of your goal is to reduce your equity exposure as you get close to retirement.

So in that case you do need to de-risk that portfolio, think about taking money out of stocks. My advice, though, if you are dramatically underweight bonds at this juncture, is to maybe think about pulling that money into cash, and then deploying it in a dollar-cost averaging program into bonds over a period of months. That way you can gain a variety of bond market environments, rather than putting all the money to work in a very volatile market.

Stipp: So you bring up bonds, and this is something that we've seen, a lot of investors worrying about in recent times. When you open that second-quarter statement, you're likely to see losses in your bond fund, which is something investors haven't seen for a while. What should I make of that?

Benz: Well, we've seen very broad-based weakness in bonds, really across categories, but definitely longer duration bonds have suffered some of the biggest losses; high-yield bonds have also had very large losses over the past couple of months. Emerging-markets bonds are another category that have had very big losses.

So you will, in fact, see some red ink and that may be somewhat unfamiliar. So I think that the risk is that investors might be inclined to completely get out of bonds. I don't think that that's warranted. In fact, I recently was talking to our colleague Eric Jacobson about what's next for bonds. He says that one thing he is hearing from a lot of bond fund managers is that, in fact, Treasury yields could be kind of topping out here at least for the near-term, or maybe the intermediate-term--that yields may not climb a lot higher. So the worst could, in fact, be over for general bonds and bond funds.

So, I don't think you want to sell out of bonds entirely. But again, if you find yourself dramatically light on bonds, I would probably just take that money out of stocks, move it into cash, and then dollar-cost average.

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