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The Short Answer

Get Your Portfolio in Fighting Shape for 2006

Use this checklist to spot-check your portfolio in the new year.

 

The start of the new year is a good time to take stock of your portfolio. Even if you don't have the time or inclination to embark on a full-scale rebalancing (the logistics of which I discussed in a previous column), here are some of the key questions to ask as you spot-check your holdings right now.

 

1. Do you own a flexible core bond fund?
It's a tricky time to be a bond investor. The Federal Reserve has been jacking up interest rates for the better part of two years, and that's usually bad news for bonds. (That's because the presence of new, higher-coupon bonds depresses the value of already-existing bonds with lower coupons attached to them.) At the same time, however, a so-called "inverted yield curve" (which means that bonds with shorter maturities are yielding even more than longer-maturity bonds) indicates that many bond-market participants believe the economy is slowing down.

So what's a bond investor to do? As I've often written in the past, it's usually a mistake to jockey around your portfolio in an effort to capture short-term market trends; you'll invariably be a day late and a dollar short. However, there's absolutely nothing wrong with casting your lot with a fixed-income manager with a good track record of navigating challenging bond-market terrain. Of course, bond guru Bill Gross, who runs  Harbor Bond (HABDX) and  PIMCO Total Return (PTTRX), is one of the best-known (and one of the best) of this ilk. In addition, Morningstar's Analyst Picks lists for Morningstar's intermediate-term bond and multisector-bond categories feature other terrific bond-fund managers whose funds have managed to thrive in a variety of market environments. (Fund Analyst Picks are free to Premium Members of Morningstar.com; for a free trial subscription, click here.) In addition to Gross, my favorites include the teams at  Metropolitan West Total Return Bond (MWTRX) and Dan Fuss and Kathleen Gaffney at  Loomis Sayles Bond (LSBRX). For very risk-averse bond investors in search of a core holding, it's hard to go wrong with  FPA New Income (FPNIX), run by Bob Rodriguez.

2. Are you wringing as much as you can from your cash holdings?
Rising interest rates are usually bad news for longer-term bond funds and most stock offerings, but they're a positive development for those who need to park their cash in shorter-term securities such as CDs and money market offerings. Thus, it pays to make sure that you're eking as much out of your short-term holdings as you possibly can. Brokerage "sweep" accounts are notoriously stingy on the yield front, so keep your holdings in these accounts to a minimum. If you're shopping for a money market or ultrashort-term bond fund, focus on the cheapest fund you can find, because cost is the key factor that separates higher-yielding short-term securities from the also-rans. Click here for more tips on earning the highest possible yield from your short-term securities.

3. Got mega-caps?
The stock market typically moves in three- to five-year cycles, and the current run for smaller stocks is looking long in the tooth. Even if you haven't been actively shoveling more money into smaller stocks, there's a good chance that the strong recent appreciation in that market segment has caused your portfolio to skew heavily toward them. Meanwhile, some mega-cap-focused funds have languished, and therefore may be consuming a smaller share of your portfolio than you intended them to.

Use Morningstar.com's Instant X-Ray tool to get a read on how your equity portfolio is distributed across the investment style box. If you find that more than a third of your stock holdings land in the small- and mid-cap rows of the grid, be aware that you're making a pretty big bet on such names versus the broad market. If you don't have time to rebalance your entire portfolio right now, consider cutting back on new investments into small- and mid-cap names while directing a bigger share of new contributions to your large-cap holdings.

In a similar vein, pay attention to your investment-style mix, as value stocks have trounced growth for the better part of five years. In particular, consider paring back on or limiting new contributions to those value funds that invest heavily in cyclical industries such as energy and basic-material stocks, which have enjoyed a multiyear runup. Meanwhile, shore up your holdings in funds that invest in so-called growth industries, particularly health care and technology names. 

If you're looking to add to your exposure to mega-cap growth stocks in a single shot, check out  ABN AMRO/Montag & Caldwell Growth (MCGFX),  Fidelity Blue Chip Growth (FBGRX),  Harbor Capital Appreciation (HACAX), or new Analyst Pick  USAA Aggressive Growth (USAUX).

4. Have you revisited your savings rate?
It's human nature: As we earn more, we tend to spend more. If you've gotten a pay increase over the past several years, make sure that you're socking away a proportionately higher amount (and ideally even more).

Also double-check that you're taking full advantage of all the tax-sheltered accounts to which you're eligible to contribute, as contribution limits increase with each passing year. For 2005, individuals whose income falls below certain thresholds are eligible to contribute $4,000 to a traditional or Roth IRA, and you have until April 15 to make your contribution. (Savers over age 50 can contribute an additional $500 to either IRA type.) If you're under 50, IRA contribution limits will stay the same ($4,000) for 2006 and 2007, but those over 50 can contribute $5,000 in both years, provided their income falls below certain levels. Contribution limits for 401(k) plans also generally adjust upward with each passing year. You'll be able to contribute $15,000 to your company's plan in 2006 if you're under age 50, and an additional $5,000 if you're over 50.

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