Guest Author - Guido Deboeck

As we are approaching the end of 2007, it is high time to reevaluate what worked and what did not work in the past year, to draw lessons and to start thinking about how to allocate assets in 2008.

2007 has been a volatile year in the stock markets in which large and mid cap domestic growth stocks did best and large, mid-cap or small value domestic stocks did worse. The one-year rates of return as of the close of Friday were 16.5% for mid-cap growth, 14.5 for large growth and 11.5% for small growth domestic stocks. The large and mid-cap value stocks increased by about 3% while the small value stocks decreased by 2.5%. All of this based on the median figure for general domestic stock funds.

Overseas the picture was much brighter: World stocks increased by 9.5%, European stocks by12.3%, emerging market stocks by 38% and Latin American stocks by 47.9%.

Looking back you have to wonder if your portfolio allocation in 2007 was sufficiently oriented to markets abroad?

In a recent issue of Kiplinger’s Personal Finance, Ken Heebner is quoted as follows: “You have to look at the entire world. Up until the past year or two, the US consumer was the driver of the global economy. That is no longer the case. [His] portfolio remains focused on the beneficiaries of strong global growth”. Maybe you or I did not see this in the past year (although investments in Latin America through ILF and EWZ have clearly produced great returns…), but it is never to late to “adapt” to this change in trend.

Another lesson from the past year is that a diversified portfolio still pays the best returns in a highly volatile market. There were several days in the past year that the market signaled a downturn and that moving into cash was a sensible option. However, even if you followed this path religiously and moved back in the market when a rally signal was confirmed, you still would have spend a lot of time in cash, while overseas the markets were booming. Hence, when the market is trending upwards a diversified portfolio of stocks is less desirable than when the market is zigzagging or in a downward trend.

Several newspaper articles have recently covered the end-of –the-year tuning of a portfolio mainly for tax reasons. Taxes are however not the only reason to examine your portfolio. It may be more important to reallocate your assets in tune with the new market trends, as outlined above, than to try to save $1,500 or $3,000 by offsetting your gains by losses. A New York Times article on the subject claimed that investors have surrendered an average of 1.4 to 2.3 percent points each year in the past 10 years to taxes. This can make a great deal of difference, but overall a smarter asset allocation can do more to increase you long term portfolio return than the savings you can realize from better playing the tax code.

As 2007 creeps to its end, the challenge for each of us is to think “out of the box” and figure what the most sensible asset allocations are for our portfolio(s) in the coming year. There are no magic formulas for this – certainly permutations on 60-30-10 of stocks, bond and cash, make no sense – and there are no financial advisors who can grasp (second guess) your particular needs and tolerance for risk better than you. In sum, this editor again advocates that based on your own homework – much of which you can find in this column – you can learn enough of the financial markets so as to produce decent returns and possibly over time outperform even the real gurus in the field.