Spring Training for Your Portfolio

This article, authored by Kyle Rudduck, CFA, Vice President, Wealth Strategy and Portfolio Manager, NB&T Wealth Management Group, appeared in the Wilmington News Journal on February 18, 2014.

Spring is in the air. Sure, snow may still cover significant parts of the ground and temperatures may be hovering just above freezing but for a Reds fan, spring is measured not by the climate but by the four words that were just uttered on February 14: “Pitchers and Catchers report!” Spring training provides professional baseball players with an opportunity to fine tune their skills prior to the start of a long, grinding season and affords managers an opportunity to take stock of the talent on their respective teams. Managers take this time of the year to examine which players have bettered themselves in the off-season and are now positioned to outperform expectations over the coming year and also discern those which may have had a great year(s) in previous seasons but no longer look poised to continue commanding the high salary they’ve earned in years past. Such an exercise provides an excellent framework for a review each investor should also be doing; “spring training your portfolio” if you will, and the following tips will hopefully assist with the process.

Assess your winners and losers – It is always good to, at least once a year, examine each of the positions in your portfolio and evaluate your winners and losers. Which of your positions were able to outperform their benchmark and which didn’t quite live up to expectations? While on the surface this may sound simple, the exercise can prove more difficult than it sounds as behavioral finance studies suggest that investors, more often than not, will exhibit biases toward certain investments that can impact their ability to objectively evaluate them. Investors can develop emotional attachments to certain stocks which hit home runs for them and may feel like selling is akin to betraying an old friend. Moreover, we can find ourselves angry with stocks that are in a slump and rush into a sell decision merely to get them off of our portfolio’s roster. Simply because a XYZ stock has returned 45% over each of the past two years does not mean that the trend will continue. Similarly, just because stock ZYX has lost 10% over each of the last two years doesn’t necessarily mean that it’s time to hit the sell button. An alternative approach to consider: think back to the original reason you made the investment in the company in the first place. What about that particular stock inspired you to entrust their management with your hard earned money? Now ask yourself what has changed? Do you still feel the same way about the company’s prospects as you did when you originally made the investment or have the underlying fundamentals of the company or economy at large changed? Often an analysis such as this can help take some of the emotion out of the decision and provide a good first step to a more a rational and objective process.

Take stock of your tax situation – For most individuals, we’re still a couple of months away from the tax filing deadline and accordingly still have certain options on the table to lessen last year’s tax burden or better position ourselves for the current tax year. Though certain limits do apply, contributions of up to $5,500 ($6,500 if you are age 50 or older) can still be made to a traditional or Roth IRA. In the case of contributions to traditional IRAs, the amount can be deducted directly from your income tax bill for the previous year. Roth IRA contributions, though not tax deductible, grow and compound tax free meaning the proceeds can be withdrawn in retirement without having to pay extra to Uncle Sam. Contributions to IRA accounts are great options not only for tax savings or deferment but also give your retirement savings a shot in the arm (baseball steroid and HGH jokes aside).

The spring season is great opportunity for a fresh start to this still, relatively new year. And just as spring training is an opportunity for baseball players to visualize what they need to do to win a World Series and then begin taking the appropriate steps to get there, this kind of individual financial assessment offers an excellent opportunity to conceptualize where we, as investors, want to be financially 1, 5, 10, years down the road and begin navigating the bases to get there.

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