How to Assess and Rebalance Your Portfolio

By Retirement PlanningFOXBusiness

As you clean out your closets and spruce up your home as part of your spring-cleaning ritual, now is also the time to review your investments to make sure you’re still on track to achieve your financial goals.

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Experts warn against frequent meddling with investments, but regular assessment are key to maintaining a balanced, well-performing portfolio. At a minimum, experts suggest reviewing your portfolio at least once a year during the spring. Also consider portfolio reviews during the fall to make adjustments for any tax issues and after any significant life event, such as a marriage, divorce, new child, job change or windfall, says Robert Stammers, director of Investor Education for the CFA Institute.

Periodic reviews can help maintain your long-term investment approach, adds Suzanna de Baca, vice president of wealth strategies at Ameriprise Financial. “You can sabotage your long-term goals by having too short term of a perspective. This is when you get into market timing—most investors are not successful at timing the market.”

While many consumer investors only check their portfolios during wild market swings, Doug Duerr, certified public accountant and wealth manager at US Wealth Management in Montvale, N.J., suggests reviewing a portfolio regardless of whether the market’s up or down and to only make investment decisions based on facts rather than emotions.

To help manage your portfolio, experts recommend asking the following questions:

Is your portfolio performance working towards your objectives?

How you invest is determined by your goals, your time horizon and how much risk you can stomach, asks Deurr. Combined with your savings amount, the answers should determine whether to use an investment strategy for growth, income or capital preservation.

As you review your objectives and strategy, experts recommend comparing your portfolio performance against a benchmark. “Look at apples to apples—you want to make sure your asset classes are doing well compared to a peer group,” says de Baca. One way would be to compare an equity portfolio to the S&P 500 or Dow Jones so you can measure performance against the market as a whole.

While you’re doing this comparison, look at how much your investments gained or lost in value by dollar amount and percentage—this relates to capital gains or losses for your taxes. “You may want to do a quick tax scan to see where you are for the year,” says de Baca.

Does your tolerance for risk match your portfolio?

“Look at investment management as risk management,” says Stammers. Ideally, investors want to reach their financial goals with the least amount of risk as possible.

Your asset allocation depends on your risk tolerance, whether you prefer low risk and are conservative or high risk and aggressive, says Scott Halliwell, certified financial planner at USAA. Figure out your comfortable risk level—your tolerance for risk may be lower than what your portfolio reflects. The value of a portfolio with an aggressive asset allocation is more likely to swing up and down more than one that’s conservative.

Are you diversified?

“The whole idea behind having a diversified portfolio is that different asset classes perform differently,” says de Baca. “A well-defined portfolio should work together to help you manage risk and return.”

To have a diversified portfolio, experts suggest owning between 10 to 15 investments in different types of industries, including bonds and international stocks. Having no more than 10% in one stock or 20% to 25% of one mutual fund is a good general rule, says Duerr. When diversifying smaller portfolios, take into account the expenses and fees, as well as minimum investment amounts for mutual funds.

Why do you own each investment?

“Professional portfolio managers will make a purchase decision with a strategy for what that holding means for the portfolio—individual investors need to do the same thing,” says Halliwell.

Regardless of a stock’s performance, the decision-making process for selling or buying an investment is the same, says Deurr. “You have to look at all the relevant research and whether [the investment] fits in with your plan.”

Objectively look at your holdings and how they’re performing on a one-, three- and five-year timeframe and against a benchmark, says de Baca. If a stock is underperforming, ask what data makes you think it’ll start performing differently. If you don’t have a sufficient answer, think about cutting your losses and moving to something with data indicating better performance. “You want to make data-driven decisions, not emotional decisions,” says de Baca.

When should you sell an investment?

“At some point, you need to sell assets and monetize your gains and you need to be smart about when to do that,” says Stammers. Everything in your portfolio should have a role. If the investment isn’t helping you work towards your goals, then consider selling that investment and doing something else with that money.

Ask yourself how the portfolio fits what you’re going to use it for, says Halliwell. “If your answer is less than logical, then maybe it shouldn’t be there.” Have a well thought out strategy and clear understanding of the risk associated with each investment.

When you choose to sell a stock, try to bring in any and all information about the stock’s performance, whether good or bad, says Deurr. Sometimes people become attached to a stock because they inherited it, love the products or used to work at the company but these reasons may not fit your investment objectives.

When do you rebalance?

Experts warn against having a portfolio that’s overweight in relation to your overall objectives if one sector’s performed really well. You may take on too much risk if you don’t rebalance, says Stammers. As you rebalance, understand your investments and be diligent about your strategy: Rebalancing may mean selling an investment that’s performing well and buying something that’s not performing as well.

If one holding grows from 10% to 25%, there’s risk to not selling a portion of that investment, says Duerr. “If you’re willing to take the risk and be over allocated in one area or another, it could have positive consequences if you continue to earn more money or negative if that investment falls.”

Are your accounts consolidated?

“If you’ve accounts all over the place, consider consolidating them so you have a more appropriate asset allocation,” says de Baca. Managing multiple accounts can be difficult and time consuming, as well as expensive. “You may have redundancy and maybe paying excess fees because you can’t take advantage of break points in funds.”

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