This article is adapted from the new e-book, Investing Made Easy.
Everything changes, and that’s certainly the case with an investment portfolio you construct.
That’s why it’s critical to monitor your holdings and, if necessary, make any adjustments that seem appropriate.
Review, but Don’t Obsess
But keeping an eye on your investments doesn’t necessarily mean getting a detailed breakdown of your portfolio every day, week or month. Granted, it’s smart to know how your stocks, bonds and mutual funds are doing. There's no need to obsess over them, though. You’ll not only drive yourself crazy, you may be tempted to overreact when markets drop, as they inevitably will.
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Instead, it’s sensible to review your portfolio on an annual basis or twice a year. Here’s what to look for and the appropriate steps to take:
Assess your portfolio’s performance to be sure it’s aligned with your goals. You don’t just want to check on your holdings to see whether they’ve increased in value since the last time you looked. You should also determine if your investments are on track to meet your financial objectives.
If they’re not, it may be time to adjust your holdings or save more.
A key element to review is whether your portfolio’s volatility is in synch with your strategy.
An aggressive investor looking for growth should expect to see periods of large gains and losses mirroring the performance of the stock markets, while a more conservative investor would want to see less volatility. If your returns don’t match up with the strategy you laid out when putting the portfolio together, you may want to consider making some changes.
Another way to measure your portfolio’s performance is by comparing it with appropriate benchmarks, like stock market indexes, index funds or actively managed mutual funds whose objectives are similar to yours.
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For instance, if you own a mutual fund that buys stocks, like large companies in the Dow Jones Industrial Average, compare its performance with the Dow. Ideally, your holdings should at least do as well as the appropriate index. Alternatively, if you own, say, a diversified growth mutual fund, measure its return against other growth funds; Morningstar.com lets you do this easily.
Comparing your performance will discourage you from needless overreaction to portfolio declines.
If a fund you own suffers a down year and others like it have also fallen, your investment choice may not be at fault. It could well be that the types of stocks or bonds it owns performed poorly. That may prompt you to stay the course with your portfolio rather than selling rashly.
Evaluate your asset allocation then rebalance your investments if necessary. You set up your portfolio initially with an asset mix designed to reflect your goals and risk tolerance. As part of your portfolio checkup, make sure your current asset mix remains in line with those goals.
How can your asset allocation get out of whack? It could be that stocks or bonds have moved up or down dramatically, which would in turn, alter the percentage of your overall portfolio with those holdings.
Say you own a growth stock mutual fund that you originally bought to comprise 20 percent of your investments. If the fund has performed well, it might now make up 30 percent of your portfolio’s value even though you did nothing to tweak your asset allocation.
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Trouble is, your portfolio may now have a riskier tilt than you wanted. And this can impact your ability to reach your goals. If you selected your investments primarily to retire comfortably, your aggressive stock fund has now ballooned as a percentage of your holdings and if that fund crashes when you’re about to stop working full time, you could have a serious problem on your hands.
There are two basic ways to adjust your asset allocation so it gets back in line:
You can sell off investments from asset categories that have become too heavy then use the proceeds to buy stocks, bonds or funds in underweighted asset categories. Or you can purchase new investments in those underweighted areas.
If you take these steps now and rejigger your portfolio as necessary to match your objectives, you can relax and enjoy the rest of your summer.