Spring Cleaning: 3 Ways to Tidy Up Your Portfolio

By Markets Fool.com

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Spring cleaning isn't just something you should do around your home. Occassionally, your investments could use a little attention as well. Maybe your stock portfolio is "cluttered," or changes in stock prices have made your portfolio a little "lopsided." Or, maybe some of your holdings no longer fit your investment objectives. While you're doing your other spring cleaning, it may be a good idea to do the same with your investments.

Dan Caplinger: Many investors' portfolios end up looking like the junk drawer in your kitchen or garage. Just like you might have a bunch of gadgets in your house that you never use, many investors collect small positions in huge numbers of stocks. For whatever reason, they stop following the companies and just hang onto their shares.

Good investment opportunities are rare enough that you shouldn't waste your capital on positions that you don't wholeheartedly believe in. So as a spring cleaning exercise, a good idea is to go through your portfolio and sweep through all the small positions that you've neglected over the years and aren't fully committed to. Evaluate each one to see whether you think that it has enough future potential to justify a place in your portfolio, and if it does, make it your goal to build up your stake in that stock to a full-sized position. If it doesn't, then commit to selling it so as to let yourself focus more on your favorite stocks.

Often, in the course of weeding through your small positions, you'll find that the proceeds you get from selling your less promising stocks will be enough to finance bigger holdings in your keepers. The end result, though, is a more manageable portfolio that you'll be able to follow more easily and keep track of for years to come.

Asit Sharma: Each year during spring cleaning, I comb my closet for Goodwill candidates. A couple of shirts from my college days, however, always seem to escape this exercise. To be honest, the purple half-sleeve oxford in a pineapple motif that I wore to a couple of tiki torch parties in the spring of '92 isn't going to see daylight any time soon. But I hang onto it for sentimental reasons.

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Don't treat your portfolio the way I treat my favorite shirts! Spring cleaning is a time for emotional detachment when examining your investments. Here is a litmus test you can apply to every stock in your portfolio:

1) What was my rationale when I purchased this stock?

2) Does this rationale still hold true today?

3) What were my expectations for performance?

4) Is the stock's performance meeting, or on the way to meeting, my expectations?

5) Does the company's primary product (or service) line continue to meet a strong market demand?

6) Do I still have faith in the company's CEO and management team?

7) Is the company innovating at a rate that will preserve its competitive edge?

8) Are revenues, profits, and cash flows all rising (or projected to rise)?

9) What does this year's annual report tell me about the business and its prospects?

10) Am I still comfortable with the stock's valuation (and if too high or too low, do I have a good reason for staying invested)?

I find that if a stock I hold can pass muster on most of these questions, it's likely to be a hold for another year. Just remember, investments are about your future, so be ruthlessly objective about the ones you hold for the long-term.

Matt Frankel: One thing you should be doing to your portfolio every so often is checking to see if any rebalancing is needed. If you haven't done this in a while, it should definitely be a part of your "spring cleaning" plans.

Rebalancing means periodically checking your portfolio to make sure your investments remain properly diversified. Even if you choose a diverse group of stocks to invest in, you still need to do some homework to make sure it stays that way.

For a simplified example, let's say that you have $10,000 to invest and you split your money equally among five different stocks, so $2,000 each. And, let's also say that one of your stocks has an excellent year and doubles, while the other four stocks stay at the same price. Now, one of your stocks is worth $4,000, and makes up 30% of your portfolio.

The problem with this is that your investment performance is now very dependent on the performance of one stock, and less dependent on the rest. To rebalance the portfolio in this situation, you would need to sell some of the stock that performed well and buy some more shares of the others.

Of course, this is a very simplified example, and your portfolio is probably much more complicated than five equally valued stocks. Still, now is a good time to take a closer look and see if any of your stocks make up too much of your portfolio, and to rebalance if necessary.

The article Spring Cleaning: 3 Ways to Tidy Up Your Portfolio originally appeared on Fool.com.

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