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Four Steps to Prepare Your Portfolio for 2014


No one will remember December, but you can start preparing your portfolio for the New Year.

This year has been filled with good cheer for stocks which is why investors are cruising into December fat and happy. The double-digit returns of the SPDR S&P 500 ETF (NYSEARCA:SPY) are nothing to sneeze at considering we haven't had a year like this since coming out of the depths of the financial crisis in 2009. Even in the mature stages of a bull market, there is always room for an upside surprise that catapults the markets to new all-time highs. If there is one thing that the market is good at, it's climbing a wall of worry that defies all reasonable logic for a dip.

The remaining four weeks of the year will most likely be all but forgotten when the dust has settled on 2013. Unless we experience a 1987-style crash, the majority of the gains have already been realized and locked in. There may be some room for rotating into different stocks or ETFs depending on your appetite for risk- or performance-chasing. However, the results will likely lead to very little marginal gains or losses considering that there is so little time left.

The same can't be said for the bond and commodity markets which have had a much less stellar year than stocks. The iShares 20+ Year Treasury Bond ETF (NYSEARCA:TLT) hasn't had a losing year like this since 2009 (note the correlation to SPY), in which it lost more than 20% of its value. The dual threat of the Fed tapering its asset-purchase program combined with a strong equity complex has sent investors fleeing from the relative safety of fixed income. This has sent interest rates soaring and set the stage for a battle of wills between the threat of deflation and inflation.

The SPDR Gold Shares ETF (NYSEARCA:GLD), on the other hand, hasn't had a losing year since it debuted in 2005 and is on pace to have nearly one quarter of its value diminished by year-end. In my opinion, this is another sign of risk-off behavior by investors who are being forced out of an asset class that pays no yield. Gold is seen as more of a safety trade these days than a store of wealth. However, that is not to say that it won't eventually find its footing and soar to new heights given the fundamental backdrop of currency fluctuations and global growth expectations.

So where do we go from here and what should you do to tidy up your portfolio before year-end?

1. Consider lightening up on high-beta stocks or positions that have served you well this year. Examples might be names in the solar, biotech, or small-cap sector that have outperformed this year. Many individual stocks have even soared into triple-digit returns in 2013, and selling a portion into strength will allow you to lock in gains and free up cash for additional opportunities.

2. If you have cash sitting on the sidelines that you want to put to work, consider some undervalued opportunities in the technology sector or developed international markets. I just covered three ETFs that are still attractive for new money even with the market near its highs.

3. Make sure that you are considering any important tax ramifications as we near the end of the year. Many mutual funds will be reporting large year-end capital gains distributions and tax-loss selling might come into play as well. You should have a game plan to navigate these intricacies or be working with an advisor who does.

4. Stay balanced and humble with your portfolio as we move into the new year. There will likely be a great deal of changes ahead that will impact your decisions, and risk management will play a big factor in hanging on to your hard-fought gains. Years like 2013 don't come around often, but when they do it is something to be thankful for.

Read more from David Fabian, Managing Partner at FMD Capital Management:

High Yield Hits and Misses

Buy ETFs to Beat the Tax Man

ETF Outflows Impact Global Gold Demand

Twitter: @fabiancapital
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