Invest with your head; sell what isn’t working

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It is still amazing to me how many retirees are still holding on to individual stocks that have gone down significantly in price and have very little future prospects. I have written about this many times before in this column because of the continuing deteriorating effects this has on a retiree’s nest egg.

The best course of action is to analyze your portfolio to determine if your current stocks truly have potential and you are not holding them based on just hope. Usually it is best to take the loss on the majority of your stocks that seem unlikely to contribute to your wealth creation and reallocate the proceeds into a better diversified mix. The new portfolio should have better upside potential and provide dividend income to supplement the growth.

You need to objectively determine if your current investments were bought at prices that may never be seen again and this may now be “dead money” for a long time. If you just keep thinking about how high your stocks were two years ago you are a rear-view mirror investor.

Rear-view mirror investing is a formula for continued disappointment. Unfortunately too many investors cling to the belief that the excesses that happened in the last few years of the 1990s was normal and the same investments will once again return to dominate. Every so often the markets and the economy are influenced by excessive optimism, and when it happens it often takes on a life of its own. The expansion and investment that result from excessive optimism lead to eventual contractions in activity and recessions.

There are many non-traditional investments that I have been using to help produce good income flows and reduce the risk level of retiree’s portfolios. I am unable to cover them in this column but I would suggest you purchase the new Retirement Planning Guide from Kiplinger’s magazine, which has some very good suggestions. One article titled “The Big Squeeze” features two of my clients and many good ideas to produce more income from your portfolio. The retirement guide is a special edition and isn’t mailed to regular subscribers.

The bursting of the bubble and recent settlements with large brokerage firms served to remind investors that in the end, underlying economic fundamentals drive stock prices, even if this is not always true over the short run. It is company profitability and the realistic prospects for future growth that ultimately determine prices. We are getting back to fundamentals and away from Wall Street hyping high price stocks.

It appears the recession has ended and we have started slowly back on an economic rebound but if you believe we are at the start of a new “roaring bull market,” think again—it pays to be cautious. While I believe we can make decent returns over the next few years it will be much harder work and most likely come from different investment vehicles.

I have posted an excellent chart on my Web site that shows how overpriced the market is even now compared to other periods. I think you will find it worth a look. To view it go to www.raymignone.com, “Client Info” button click on “Seeking Good Returns”

Raymond D. Mignone is a fee-only Certified Financial Planner & Registered Investment Advisor specializing in retirement planning and investment management; he can be reached in Little Neck at 229-2514 or visit www.raymignone.com.

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