Springtime is traditionally a time to clean, renew and refresh. It's also a great time to clean up your investment portfolio. Given where the markets have been in recent years, especially the major gains in 2013, and to an extent some shifts in early 2014, this is a great time to look at doing some (very late) spring cleaning of your investment portfolio. Here are a few steps to refresh your investment portfolio:
1. Think of your investments as a portfolio versus a series of accounts and holdings. This is the first key step. Many investors focus on each holding and fail to look at the sum of the parts. Or perhaps they allocate their individual retirement account or 401(k) account but don't consider other investments and accounts. Start with your overall portfolio and determine if you are properly allocated in line with your financial goals and risk tolerance. Ideally, this would all be an extension of your financial plan. Failure to do this can result in taking too little or too much risk and worse: not reaching your financial goals.
2. Organize your various accounts into one portfolio. Make sure that you are receiving statements from all investment and retirement accounts on a regular basis. You may receive them monthly or quarterly, depending upon your custodian and the type of account. Keep them all in a file (paper or electronic or both). I enter all client accounts and holdings into a spreadsheet. I suggest categorizing your portfolio by account and by asset class (large cap, small cap, etc.). At a minimum, this will show you how well you are diversified across different asset classes. You might also be amazed at the number of individual holdings across all of these accounts. I call this financial clutter. This is common among folks who might have a number of old 401(k) accounts at their former employers.
3. Consolidate accounts where possible. This will make monitoring your portfolio infinitely easier. If you have several IRAs and old 401(k)s from previous employers, look at consolidating them in one place, for example, a single IRA account. When you have a bunch of accounts scattered hither and yon, it is easier to ignore some or all of them.
4. Review your current investment holdings. Have your stocks hit their sell targets? How do your mutual funds and exchange-traded funds compare to their peers? It is important to establish a process to monitor your individual holdings against appropriate benchmarks on a regular basis.
5. Rebalance your portfolio. You may need to buy and sell holdings, or it is possible that you can allocate new investment dollars to do this. Once you have determined that rebalancing is needed, you should get your allocation back in line as soon as possible to ensure that your allocation is consistent with the risk and return targets in your financial plan. Remember, your allocation should be reviewed across all of your various accounts.
In 2013, U.S. equities largely did well. So far in 2014, bonds and real estate have done better than anticipated and even emerging market equities have staged a recent comeback. Overall, your portfolio may look far different than your target asset allocation at this point in time.
6. Don't be afraid to take a loss. All too often investors will want to hang onto an investment that has lost money to allow it to get back to even. In my opinion, this is a horrible idea unless you feel that that particular stock or fund is the best place for your money. If not, bite the bullet, sell the dog and invest the proceeds in another investment you feel has greater potential.
7. Think risk. Depending upon who you listen to, we may be in the middle of one of the greatest bull markets of all time or on the edge of a cliff. I have no idea where we are headed, but we have seen a torrid rise in the markets since early 2009. At the very least, this is a great time to understand the potential downside risk in your portfolio and to see if this is a level of risk that you are comfortable assuming.
Roger Wohlner, certified financial planner, is a fee-only financial advisor at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides financial planning and investment advice to individual clients, 401(k) plan sponsors and participants, foundations and endowments. Roger is active on both Twitter (@rwohlner) and LinkedIn. Check out Roger's popular blog The Chicago Financial Planner where he writes about issues concerning financial planning, investments and retirement plans.
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