You can’t predict, but you can prepare Now that the first half of 2015 is over, it’s a good idea to do a portfolio check-up. This deep dive should seek to answer two basic questions: How are your investments doing, and how is your allocation positioned for the future? To answer the first question, if you have a balanced portfolio, it should probably have returned somewhere in the 0.50%-2.0% range since the beginning of the year. Let’s take a look at some indices and index-tracking funds to see how I arrived at that. The S&P 500 SPX, -0.39% , including dividends, was up 1.23% for the year through June 30. The main bond benchmark, the Barclay’s U.S. Aggregate Bond Index, lost 0.10% for the year. That means if you have a balanced portfolio — 60% S&P 500 TR and 40% BarCap Agg — your portfolio gained around 0.70%, not including expense ratios on funds and other fees. Small-caps and international stocks outperform The Vanguard Balanced Index Fund VBINX, -0.03% gained exactly 1% for the first half of 2015 because its stock component is the MSCI US Broad Market Index instead of the S&P 500 TR. The MSCI index owns mid-cap and small-cap stocks in addition to the large ones in the S&P 500, and smaller stocks did better than larger ones over the first half of 2015. If your portfolio did better than 1% for the first half of 2015 because you have a lot of small-cap and mid-cap exposure, that’s great for now, but it could mean trouble ahead. For the 15-year period through June 30, the Russell 2000 IndexRUT, -0.10% (the main domestic small-cap index) has returned 7.6% annualized versus 4.36% annualized for the S&P 500 TR Index. That’s major long term outperformance. It can’t go on forever. Also, successful asset class evaluators such as Grantham Mayo, van Oterloo in Boston view small-cap stocks as more expensive and poised to return less over the next seven years than their larger brethren. Take this as an opportunity to trim. Another possible reason for a balanced portfolio outperforming a combination of the S&P 500 and the BarCap Aggregate Bond Index is that you own a lot of international stocks For example, the MSCI EAFE Index, the main international developed markets stock index, was up almost 5.5% for the first half of the year. If international stock exposure is the cause of your outperformance, you probably deserve congratulations because most investors don’t have enough of it. It’s fine to have half your stock allocation in foreign stocks, including but not in addition to emerging markets exposure, simply because foreign stocks account for roughly half of the world’s market. It also happens that many foreign markets, including emerging markets in particular, look cheaper than the S&P 500, according to both GMO and another asset class evaluator, Research Affiliates. REITs and utilities lag While broad swaths of the small-cap indices and international stocks have done well, REITs and utilities haven’t. Although a six month period isn’t typically enough to justify big portfolio changes, you should take a long, hard look at your REIT and utility exposures if they’re the cause of your underperformance. Because of frustratingly low bond yields, many investors have chased after these high-yielding stock sectors over the past few years, pushing prices up. The sectors finally rolled over in a meaningful way in the first half of 2015 with the Vanguard REIT Index Fund VGSIX, +0.55% down 6.3% and the S&P Utilities Index down 10.7% Perhaps the worst is over for those sectors, or perhaps it’s just beginning; it’s hard to know for sure. But they look expensive on traditional valuation metrics, and it’s not wise to substitute dividend-paying stocks for bonds in an allocation in any case. 4 moves to make After you’ve done your performance assessment and attribution, it’s time to consider how you’re positioned for the future. Veteran investor Howard Marks likes to say, “We can’t predict, but we can prepare.” With that in mind consider the following four things about your portfolio positioning, some of which I’ve mentioned already. 1. Make sure the split between stocks and bonds is where you want it to be. Nothing is more detrimental to investors than their inability to stick to an allocation. 2. Make sure small stocks don’t occupy more than 20% of your stock exposure. They look expensive. 3. Make sure you’re not substituting dividend paying stocks for bonds. Bonds look like a poor investment now, with their minuscule yields, but an even poorer investment is an allocation to stocks that’s too volatile and causes you to sell after a big decline. If you fear inflation and losses from your bonds, keep the duration short and the credit quality high, or hold some extra cash. 4. Check the fees you’re paying — both on your funds and to your adviser, if you have one. If an index portfolio returns 0.60%-2.0% range for the six-month period, but you’re paying 1% for a half-year’s worth of fund expenses and advisory fees combined, you’ve just given up a serious chunk or possibly more than all of your potential return. MarketWatch