NEW YORK (CNN/Money) -
The market may finally be coming back to life. Or, the latest stock rally may be just another false start. For many investors who have seen their hopes dashed again and again, it's hard to know what to think.
But bull market or not, that sickly portfolio of yours could use some TLC. With a little more than two months to go until the end of the year, this is a great time to look for bargain stocks, rebalance your mix and even get ready for tax season. Here are three things you can do right now -- whether or not you think stocks have changed gears.
Rebalance your mix
Go ahead, open your latest financial statement. Even with the Dow up 1,200 points in two weeks, you'll have plenty of red ink to digest. Your first move should be to figure out if you still have the right asset allocation for your long-term goals, said David Caruso, a certified financial planner and author of "Decoding Wall Street."
Not sure where you fit? A mix of 40 percent stocks and 60 percent bonds would have produced average returns of 8.7 percent a year between 1926 and 2001, according to Vanguard. An all-stock lineup would have raised your returns to 10.7 percent a year. (See accompanying chart.)
But you can't build a portfolio based solely on potential returns -- you have to consider your risk tolerance. The higher your stock weighting, the greater your potential loss during a bad year. If you put 100 percent in stocks, your worst one-year loss would have been 43.1 percent, according to Vanguard. If you have years to retire you can afford to take on more risk. If you're 65, however, you can't take the chance.
Next, you'll have the painful job of selling some of your winners and buying more of your losers. For most people, that will mean trimming bonds and buying more growth stocks that have sorely underperformed the rest of the market, Caruso said. For most people, it's probably enough to rebalance once a year, but some may prefer to do it as often as quarterly. (For more on how to rebalance your portfolio after the bear market, click here. For more on rebalancing from CNN/Money's Walter Updegrave, click here.)
Save more
While a diversified portfolio and time will heal a damaged nest egg, many investors will have to set aside more money every year to make up their losses.
Consider this example from Financial Engines, a California research firm. Let's say a 55-year-old married couple had hoped to retire at 65 with a nest egg of $1.6 million that would pay them $145,000 per year. They each contributed $10,000 per year to retirement plans, with diversified investments that included a stable-value fund, an international fund and an index fund. (Stable-value funds are bond funds for your 401(k) or IRA that generally earn 2 percentage points or more than money markets.)
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 Staff Writer Martine Costello talked recently about a new study showing that stocks perform better in the second half of a decade.
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In January 2000, they were on track to fulfill their dreams, with assets of $450,000. But the bear market took its toll -- by July 2002 they had $377,151. In order to stick with their plan to retire in 10 years, they'd need to more than double their annual savings rate, from $20,000 a year to $51,000.
Luckily, the government is making it easier for people to save in tax-deferred retirement plans. 401(k) investors were able to save an extra $500 in 2002, for a total of $11,000, while IRA investors could sock away an extra $1,000, for a total of $3,000. Workers age 50 and older could salt away even more -- up to $1,500 in 2002. 401(k) savings rates will keep rising until 2006, while IRA levels will peak in 2008. (Click here for more on the savings limits.)
But not everybody is taking advantage of the higher limits. Out of 3.1 million 401(k) investors tracked by Financial Engines, only 11 percent increased their savings to the maximum allowable rate in 2002. Part of the reason is people don't know about the new rules. But some companies haven't yet made administrative changes to allow for the higher contributions. There's not much you can do about it, but you can at least max out your IRA and try to save more in a taxable account.
Manage gains and losses
A lot of investors didn't want to sell their shares when the market was soaring because they didn't want to pay capital gains on their profits. Now, they don't want to sell because they won't make up their losses. But figuring out gains and losses is important in boom and bust markets, said Doug Flynn, a certified financial planner in New York.
An easy rule of thumb is to sell any stock that has fallen 20 to 25 percent from when you bought it, said Flynn said. Other planners use 33 percent as a benchmark.
If you bought 100 shares of Lucent at $58 and now it's trading around 70 cents, your $5,800 investment is now worth a paltry $70. That gives you a loss of about $5,730. You can offset equal dollar amounts of gains and losses and avoid paying capital gains taxes. But if you don't have enough gains to match your losses, you can deduct up to $3,000 per year of it until it's used up.
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If you want to take a loss but think the stock has long-term potential, there's another option. You can buy the shares back after 31 days so you don't run afoul of the wash-sale rule. (The rule prevents investors from taking a loss in a stock or fund and then buying it right back to profit on the rise.) Just make sure you do it by Nov. 30 to complete the transaction by the end of the year.
If you have taxable losses in a mutual fund, you can get around the wash-sale rule by picking another fund with a similar investing style. But when you buy a replacement fund in the fourth quarter, check with the fund about its "record date." That's the day used to determine who is a "shareholder of record" and hence subject to the fund's capital gains distributions. Be sure to buy after that date, otherwise you will owe taxes on the fund's distributions for the year, even though you are a new investor.
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