As we close out 2010 and look forward to a healthy, happy and prosperous 2011, it’s a good time to do a checkup on your investment strategy.  Is your asset allocation mix still appropriate?  How should you position your portfolio for the New Year?  Will it be a good year for stocks?  What about bonds?  Should you own some international equities, real estate, and/or commodities?

Based upon some of the headlines I’ve seen lately, it looks like 2011 will be the year for stocks.  But are you willing to risk your portfolio based on headlines?

In today’s Wall Street Journal, there’s this…”Stock Investors Look on the Bright Side.”  It discusses that despite the deteriorating debt situation in Europe and the U.S., and the threat that inflation may derail emerging market economies, the stock market is hitting two-year highs and investors are more bullish than they have been in years.  We’ve had a rally underway since August that has basically been a steady move higher.  Volatility is low and investor complacency is high.  At least one of the strategists mentioned in the article seems to offer some good advice.  “With everyone so bullish, you have to be damn careful here,” said Peter Boockvar, a strategist with Miller Taback & Co.

Last week, there was this article, also from the Wall Street Journal…”Stock Markets Are Poised to Steal the Show Next Year.”  This article says that investor resilience to the euro crisis (although I read that as complacency) and good economic and corporate news have helped drive international and domestic stock markets higher in the fourth quarter of 2010.  “Those same forces should drive performance next year too,” the author, Richard Barley, concludes.  At least he adds that volatility is likely.  Political and policy issues could unsettle markets, particularly in Europe, as their debt crisis continues to unfold.  He also cites Chinese monetary policy and emerging market inflation (hmmm…twice we’ve heard about that one) as potential risks to the upward path of equities.

But what about bonds?  There are numerous stories out there about the “bond bubble.”  And as we keep reading the headlines, it looks like bonds are definitely out of favor.  On December 16^th, another Wall Street Journal article reported that “Investors Pull Cash Out of Bond Funds.”  The article reported that for the week ended December 8^th, investors moved $1.66 billion out of bond funds.  It was even worse the following week.  On December 22^nd, Investment News Daily noted that in the week ending December 15^th, $8.62 billion flowed out of bond funds.  The article said that investors are fleeing the bond funds after signs of an economic recovery and a stock market rally fueled thoughts that interest rates may rise. 

So, what should we do?  Sell our bonds and load up on stocks?  Actually, you might want to consider doing just the opposite.  The track record of the “average” investor is dismal.  Individual investors have a terrible habit of letting the emotions of the moment drive their buy and sell decisions.  And most often it means they are buying when they should be selling, and selling when they should be buying.  We don’t have to look too hard for recent evidence.  In July of this year, we read about how investors were pulling big money out of stock funds…just before the rally started in August.

Ok, so we should take a contrarian approach and buy bonds while selling our stocks?  That’s probably a better strategy, but it’s still not one that I would recommend.

Instead, try not to listen to the noise of the market and the people who try to predict where it’s going.  Make sure your portfolio is properly allocated to reflect your personal situation…your goals, time horizon, risk tolerance, cash needs, etc.  Make sure it is diversified across all the different asset classes.  That means owning large company stocks and small company stocks.  It means owning both U.S. and international stocks.  It also means owning bonds of different quality and maturity.  And it means you should have some exposure to emerging markets, real estate and commodities.  Tune out the noise and take a look at your portfolio every now and then to rebalance when the markets change your mix.  It will make 2011 less stressful, and most likely, a more profitable year for you and your investments.