Over the past two years, balanced portfolios have posted double-digit returns driven mainly by rising stock prices. Your challenge for 2014 will be to design and implement more disciplined processes for making investment recommendations to your clients. This requires a big time investment, but it may be the best investment you make in this year.

Some factors to consider:

Rebalance. Over the past couple of years, global equities have posted very strong performances, both in absolute terms and relative to bonds and domestic stocks. As a result, client portfolios may need rebalancing – or may be nearing that point.

It’s always tough to trim your best-performing asset (e.g., U.S., global and small-capitalization stocks) to buy more of a money-loser (e.g., bonds, emerging-markets stocks). But a rebalancing method can be successful if it nicely balances the benefits of letting winners run while paring back top performers to control risk.

If you haven’t rebalanced client portfolios – or had recent discussions about it – you can improve your practice by establishing a rebalancing process that strikes the above-noted balance.

Don’t be too quick to follow star managers. Financial advisors and analysts have long debated the right course of action to take after a star portfolio manager leaves to work for a competitor (or to launch his or her own firm).

We can be easily persuaded by portfolio managers’ slick presentation skills or engaging stories about how they invest. But based on my recent examination of 14 funds that suffered significant manager changes over the past dozen years, you may want to take time following the next big manager change that affects your clients.

My sample is too small and covers a relatively short time frame to draw any firm conclusions, but my examination found that most star portfolio managers have lagged their former funds by a good margin. I was surprised by some of the specific instances of underperformance. There’s also good academic research that found that institutional investors’ newly hired portfolio managers perform no better (often worse) than terminated managers.

Following a disciplined framework for assessing such changes – detached from how well a portfolio manager can work a room of brokers – will increase your odds of making sound decisions.

Don’t abandon bonds. A long-time acquaintance recently asked me if she should sell her bond fund units and invest the proceeds in a U.S. equity fund. I disagreed, but I wasn’t very persuasive because she did the trade. Others have been moving to reduce interest rate risk at the expense of much higher credit risk.

Clients sometimes can nudge you into executing their desired trades even when you don’t agree with them. But this is an instance in which you must stand firm. Bonds continue to provide steady portfolio income and portfolio diversification (including bear equities market protection). This is a valuable role that shouldn’t be underestimated. Remember that reaching too far for extra yield (by assuming more credit risk) is part of what started the recent financial crisis.

The link between all three pieces of advice is the use of disciplined processes. Developing well-thought-out processes is an investment that will pay dividends for years to come.

Dan Hallett, CFA, CFP, is vice president and principal for Oakville, Ont.-based HighView Financial Group, which designs portfolio solutions for affluent families and institutions.

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