Keep your investment fortunes on track for the new year: Pape

Did you make any New Year’s resolutions this year? Did anyone you know?

Probably not. No one seems to bother any more because any resolutions that are made typically don’t last a week.

So I’m not going to suggest any financial resolutions in this first column of 2017. I will, however, offer a checklist of three key things you should do to ensure your investment fortunes stay on the right track in what promises to be a turbulent year.

Rebalance your portfolio

The year just ended was a remarkably strong one for stock markets. The S&P/TSX Composite finished up by 17.5 per cent while the Dow advanced 13.4 per cent, establishing new records in the process. Meantime, bonds had a rough year. If you earned 4-per-cent total return on your fixed income holdings, you did well.

Assuming those results were reflected in your own account, your asset mix is probably out of whack at this stage. You have greater exposure to the stock market than you originally intended, which leaves you more vulnerable to a correction.

Solution: Sell some of your stock winners to reduce your exposure. Failure to rebalance your portfolio at least once a year will leave you more vulnerable to any market correction. Caution: Consider the tax consequences before you pull the trigger. If possible, see if you can offset some gains with capital losses.

Re-evaluate your bonds

Most people think the 30-year bull market in bonds has come to an end. That may be so, although if you recall the experts were saying the same thing last year at this time after the Federal Reserve Board raised its key rate in December 2015. Instead, bonds went on a strong run that lasted through most of the summer before plunging late in the year on expectations the incoming Trump administration would bring in stimulus measures that would feed inflation and prompt more rate increases.

Solution: If you own good-quality, actively managed bond funds, I would keep them. Professional managers are well equipped to deal with the bond turbulence we’re experiencing. If you are making new investments, stay short-term. Bonds with maturities of less than five years are less vulnerable when interest rates rise. More aggressive investors may want to add some high-yield bonds to their mix.

Build your cash

No matter how you look at it, the stock market is overvalued. We will almost certainly have a correction soon and it could be a major one. Investors appear to have priced in all the potential gains from Donald Trump’s business-friendly promises and ignored the downside of his protectionist threats. Once he takes office and his words start to translate into action, I expect reality to kick in and stocks to pull back. The year ahead could be one of high risk and great opportunity. In those circumstances, a significant cash reserve will be an advantage.

Solution: If you sell some stock winners, don’t be too quick to reinvest the proceeds. You may be able to do so within the next few months at cheaper valuations. Keep your money in cash for now, identify the stocks you’d like to own, and be ready to move when they go on sale.

My final suggestion is to consider where you are on the financial emotion scale. Imagine what your reaction would be if 2017 turned out to be a repeat of 2008 (I’m not expecting it will be but this is a worst-case scenario). Would you be sanguine? Uncomfortable? Devastated? If the latter, your portfolio is not in tune with your mindset. Fix it, and soon.