it’s not too early

We’re now in the middle of October.

The second half of December is a completely lost time for professional equity investors. Volumes shrink considerably. Most professionals know their year has long since been either made or broken, so they’re on vacation. Many markets are shut down for part of the period. Accountants are starting to tot up the official score. Yes, there are sometimes very profitable anomalies to watch for (moe on this in another post). But, practically speaking, the party’s over and the lights have been turned out, so it’s much too late to be starting to reorient a portfolio.

In the first half of December, it starts to become much harder to talk to companies or to brokerage house analysts. They’re all involved in their internal pushes to close out the year, so they don;t have a such time as the would in other months. And they’re either out of the office or planning an imminent holiday departure, as well.

This means thinking about next year and acting on new strategic thoughts is starting to happen in world stock markets now, and will take place in the six or seven weeks left before December rolls around.

That’s our main investment job from this point on.

what to do

Two approaches:

1.  Develop/update your strategic plan. This is a high-sounding name for trying to figure out what the world will look like and how stocks (and maybe bonds and cash) will behave as investments after 2011 dawns. Stuff like: will it continue to be better in the US to bet on companies with a lot of foreign earnings or should one switch some money to thus-far underperforming domestic-oriented names? (I’ll be posting my thoughts for next year in a week or two

2.  Mechanical housekeeping. Three aspects to this:

—position sizes.    2010 has been a year of widely varying performance by different world stock markets and by individual stocks within them. If you’ve been very lucky or skillful, you’ll have positions that are up 50% relative to your overall portfolio. Some may violate your personal position guidelines. In my opinion, no one should have a stock, or mutual fund/ETF position (except index positions) that’s more than 10% of his total wealth. Your ideas may differ. But there can easily be positions that, when you sit down to look at them, are too risky because they’re too big. You should fix that.

—losers. Take a hard look at what’s gone wrong. We all play mental tricks with ourselves to rationalize away underperforming areas of the portfolio. But chances are, deep down inside, we know when something is a mistake. Sell and redeploy the money.

—asset allocation. This is the most important item under heading #2. I’ve saved this for last because I find it the most difficult decision to make. If you started with a 50/40/10 model allocation among stocks bonds and cash, you almost certainly are underweight cash and are likely underweight bonds. Neither of these asset categories look even remotely attractive to me. What to do? I’ve decided, as recent market action says many others seem to be doing as well, to substitute high dividend-yielding stocks for part of my stocks/cash allocation. In reality, you should be aware, if you also do so, that this is a change in asset allocation and an increase in the risk level of your holdings. At the very least, this means watching the consequences of the decision very carefully; it should probably also mean dialing down the risk level in your pre-existing equity holdings to compensate for the additional allocation to this category.