by Richard Leader

Year-end is a time for family and traditions. It is also a time for reflection and preparation: looking back at your investment decisions in 2009, but more importantly, looking forward to prepare your portfolio to realize its maximum after-tax returns in 2010 and beyond.

The following ideas may be helpful for utilizing investment losses, protecting earnings and mitigating risk.

Check your allocation balance

After any year of market fluctuations (in either an up or down market), chances are the allocation you initially set for your portfolio is no longer balanced. For example, if on January 1, 2009, you allocated your portfolio with 10 percent cash, 40 percent bonds and 50 percent stocks, the rally in stocks in 2009 may have caused the bonds or cash portion of the portfolio to become too small as a percentage of the total portfolio. In this case, you would trim back stock holdings to return to your targeted balance.

Further, there can often be a wide disparity of performance within a portfolio. Some good stocks have been losers this year, while others may be up 100 percent. Evaluate your portfolio to see if your initial allocation in one company now represents too large a percentage of your portfolio.

Counter to what many advisors preach, there is no magic formula for the right portfolio allocation. It’s a very personal decision, and typically depends on age, attitude toward risk, concerns about retirement or the kind of legacy you hope to leave for future generations.

It’s also important to remember how you felt as the market dropped last year. The stock market is admittedly risky in the short-term, but does present good long-term potential for growth. Can you afford to make long-term decisions?

Make smart use of “found” holiday money

Year-end is a popular time for “found” money such as year-end bonuses, which typically results in an influx of money into the market in the first quarter. It may be smart to leave some of that money on the sidelines and put it into the market gradually throughout the year rather than entirely upon receipt, so you’re not buying into the peak. This strategy is often referred to as dollar-cost averaging.

Whenever you invest your holiday money, take a moment to check your allocation balances and ensure that you’re deploying it into the appropriate mix of stocks and bonds.

Familiarize yourself with tax implications

After the bear market last year, many people have tax loss carryforwards. They may be able to take up to $3,000 of those losses and offset them against ordinary income.

However, many investors may be sitting on a large amount of losses, far more than the $3,000 they can use to offset ordinary income. The good news is that the market has rebounded so strongly this year that many people are now also sitting on significant recent gains. Selling winners may seem counter-intuitive, but this year can be a good opportunity to do so, and will shelter these gains with the tax loss carryforward from 2008.

Take time this holiday season to reflect on lessons learned and create an investment strategy that you can feel comfortable following through both bull and bear markets. Keep your strategy document in a safe place. Then, refer to it the next time market turmoil strikes so you can remain committed to your long term goals and prevent emotional decision making. Investing will nearly always be successful if you focus on the long-term.

Richard Leader, CFA, Chief Investment Officer of First Houston Capital, has been managing investment portfolios for more than 30 years. For more information, go to www.firsthoustoncapital.com