Check portfolio's balance after long bear market

Betty J. Neal is a certified financial planner and investment representative for Edward Jones Investments.

Over the past couple of years, we've had a long bear market and a period of low interest rates. Consequently, it's been tough for stock owners and income-oriented investors.

If an investor falls into either group and most people do he may be wondering what to do. An investor can't control market volatility or the movement of interest rates. But a person can create a "recovery plan" to make the best of the situation and, in the process, make progress toward financial goals.

Put losses to work

Investment losses are tax-deductible, to a point. Use capital losses to offset any capital gains, plus up to $3,000 of other income, including earned income. So, for example, if a person realized a $1,000 capital gain this year from selling stocks or other appreciated investments, he could write off up to $4,000 in losses. And a person can carry forward any "excess" losses.

Rebalance the portfolio

An investment portfolio may have become "unbalanced" and an investor might not even be aware it happened. For example, if the stocks have declined sharply, then bonds or other fixed-income instruments may now make up a larger percentage of the portfolio's total value than originally intended. Consequently, a person could be losing out on growth opportunities which makes it necessary to rebalance holdings to match individual risk tolerance, goals and time horizon. Keep in mind that there may be tax consequences associated with rebalancing.

Stabilize investment income

What should an investor do with bonds or certificates of deposit that mature when market interest rates are low? A person could "park" the funds in a money market account until interest rates rise again, but that might take a while and, in the meantime, a person will have almost certainly missed out on some better opportunities.

A "bond ladder" may be a better option. To create a bond ladder, invest in an array of short, intermediate and long-term high-quality bonds. When rates are rising, use the proceeds from maturing bonds to buy new bonds at the higher rates offered by longer-term bonds.

Swap for quality

Over the long term, high-quality investments such as stocks of well-run companies with solid business plans will reward investors more than investments that run hot and cold.

Look through the portfolio for opportunities to replace lower-quality investments with higher-quality ones that may now be attractively priced.

Tax-smart investing

Taxes can significantly erode overall investment returns. That's why an investor needs to look for tax-advantaged vehicles. Take full advantage of tax-deferred instruments, such as 401(k)s and traditional IRAs. An investor can get tax-free earnings growth from a Roth IRA, provided he meets certain conditions. Depending on the tax bracket, an investor may also be able to benefit from municipal bonds, whose interest is exempt from federal income taxes and may be exempt from state and local taxes. However, municipal bonds may incur the alternative minimum tax.