Streetwise: Now is the time to think on rejuvenating portfolio

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They call the conclusion of a chess match the endgame, and it takes special skills to master that part of the contest. In the stock market, we have the end-of-the-year game. What makes this time of the year so unique is the inevitable tax-loss selling and profit-taking that occurs as portfolios are pruned and tuned ahead of the rapidly approaching New Year.

Therefore, the period between mid-November and year-end can provide some of the best buying opportunities of the entire year. At the same time, no one would argue that recent market activity has diverged considerably from a so-called normal.

Daily volatility has resulted in the equity markets becoming scary, even to the "old-timers."

To make matters worse, the fear of higher taxes has put a chill on even dividend-paying stocks. If the Bush tax cuts expire completely, the worst-case scenario would be an upper-income marginal tax rate of 39.6 percent, applicable also to dividends.

However, if your income exceeds $200,000 for individuals or $250,000 for couples, there is the new 3.8 percent tax rate that comes as part of the Affordable Care Act on dividends and capital gains. In other words, dividends could be taxed at a rate as high as 43.4 percent. Even if the Bush tax cuts remain in place, dividends would be taxed at 18.8 percent given the Affordable Care Act.

Goldman Sachs recently notified clients that it believes the ultimate outcome will be that dividends and capital gains will be taxed at a 20 percent rate as favored by Senate Democrats. That means the maximum rate would then be 23.8 percent if you are in the upper-income brackets. As a result, many investors are selling stocks simply to avoid potentially higher taxes in the future, while disregarding future corporate performance.

Nonetheless, now is the time to consider re-balancing and rejuvenating your portfolio. You want to remove dead wood and replace it with companies that are likely to have a brighter future going forward. Specifically, you are looking for companies whose shares have been beaten down because they are either being sold for tax reasons, or have simply succumbed to the overdone market sell-off.

Using methodologies such as discounted cash flows and intrinsic value, your investment objective should be to create a return that at a minimum exceeds the sum of what a 30-year Treasury bond would pay, combined with what you will lose through taxes and inflation while compensating you for a certain degree of risk.

To simplify the equation, consider that the guideline for my students is a minimum return over three to five years of 10 to 15 percent. However, it is foolhardy to believe that you can always pick winners.

A prudent stock selection process, combined with a reasonable asset allocation and risk profile, will likely enable you to meet that objective as you search for companies correlated with an expanding economy.

To find those stocks, you are going to need an edge. If you want to become a market-trouncing master strategist, your knowledge of a given company must be superior to that of the great unwashed.

So where do you begin?

Each year about this time, I offer up 12 investment ideas, the performance of which I then review a year later. However, they are merely suggestions designed to be a catalyst to stimulate ideas and thinking on your part about possible sectors and companies you might want to investigate.

So start now with your own research, and after Thanksgiving we will see how my picks of last year did. At the same time, I will offer up another list of 12 companies for your investing pleasure.


Lauren Rudd is a financial writer and columnist. Write to him at


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