Repair your damaged portfolio, prepare for market's recovery

You'll need that strength, and more, to face this market and do what you can to repair the damage to your portfolio.

The market's free fall has done plenty of harm. Stocks, depending on which index you follow, are off 40 percent or more for the year. And the only bonds that don't seem to be losing money are those issued by the government.

There are a few things you can do now, before year's end, to improve your situation.

_ Figure out what you can learn.

Many people probably didn't have a clear idea of the risk in their portfolios before all of this began. But they do now.

"You have to decide if you really messed up and what to do to fix it" is the way certified financial planner Steven L. Pomeranz puts it.

Pomeranz, head of Pomeranz Financial Management in Boca Raton, Fla., recommends figuring out whether your portfolio was properly diversified going into this mess. Diversification is a way to reduce risk by spreading your investments out to different asset classes: stocks, bonds, real estate and cash, for example.

If your portfolio is not diversified, spend some time learning about diversification now. Do your own homework, even if you are following the advice of a professional. And don't overlook the second part of Pomeranz's advice: Fix it.

That means even in this market, at this low point, you need to make changes to get your portfolio properly positioned. It's called rebalancing _ getting the right mix of stocks, bonds and other investments. You have to buy some securities and sell others to get your portfolio back into the design you initially made for it.

Stocks are certainly less costly than a year ago, so buying's the easy part.

_ Take advantage of a bad situation.

Mitch Margolies, a partner at Rachlin, a South Florida accounting and advisory firm, suggests calling your mutual fund companies to find out what the funds will be paying out in capital gains and dividends.

You'll have to pay federal income tax on those distributions. In a year when so many mutual funds have lost value, that hurts.

One way to ease the pain: Lower your tax bill. You can offset those gains by selling stocks or mutual fund shares at a loss before this year ends.

Once you know how much your gains are, "you can make some educated decisions," Margolies said.

Most people can also use up to $3,000 in capital losses from investments to offset ordinary income. Congress may even raise that amount, if we're lucky.

_ Make a plan for recovery.

Plenty of people are on the sidelines, having cashed out, either at a good time (early this year) or not (any time afterward). Many will return to the market when they feel safe.

Certified financial planner Daniel Elie, president of Dagel Financial in Miami, is crafting plans for how his clients can get back in. He's suggesting they use dollar cost averaging _ putting a set amount of money into the market at regular intervals. And depending on the person's time horizon and risk tolerance, the time frame for shifting money back into the market would be more than one year or 18 months. Elie said he'd evaluate the market monthly to decide when to begin.

"When we came out of the market (starting in January), we knew we were not going to stay out," he said. "It's just a matter of waiting for a good time to dollar-cost-average back in."

_ Think bonds.

If you were too exposed to stocks _ if the stocks you held carried too much risk _ then you need to shift. Pomeranz and others note that bonds can level out the stock market's swings. High-quality, corporate bonds have taken their own beating, making them very inexpensive relative to the Treasury bonds that investors have rushed into for safety.

Finally, remember this: Stock markets anticipate the end of recessions before recessions end.

To be in the market is to be in place to participate in the recovery.

___

� 2008, Sun Sentinel.

| Finance