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Managing an investment portfolio

As spring is upon us, you may be gearing up for some serious spring cleaning. Besides clearing out your garage or that hallway closet cluttered with junk, it’s a great time to do some financial spring cleaning, too. For instance, combing through your investments. Here’s how you can go about “tidying up” your investment portfolio.

Beware of Performance Chasing

First things first: Spring cleaning your portfolio isn’t about switching out stocks or funds that aren’t doing well for ones that have been doing well recently. This is called performance chasing, and can hurt you in the long run.

It’s actually very tough, if not impossible, to know which market sectors or asset classes will do better than others, explains Dejan Ilijevski, a portfolio manager and president of Sabela Capital Markets. Instead, avoid trying to time the market and other unnecessary changes that can be costly. “Allowing your emotions or opinions about short-term market conditions to impact long-term investment decisions can lead to disappointing results,” says Ilijevski.

Instead, practice discipline and keep your eye on the prize. “To build wealth, an investor should stay in his or her seat,” says Ilijevski. “Your investment plan should take into consideration your risk tolerance and capacity for risk and timeframe.”

If you feel comfortable with your portfolio, you’ll be more likely to stick with it for the long run, explains Ilijevski. If your current portfolio doesn’t sit well with you, it may be time to re-evaluate it and make tweaks so it’s in better alignment with your goals and target dates.

Reassess Your Risk Tolerance

It may be an opportune time to reassess your risk tolerance. See how it relates to your overall financial goals, as it’s possible that they’ve changed due to circumstances in your life. For instance, maybe you’re going through a divorce and may be less willing to take on riskier investments. Or maybe you’re investing in your 40s or 50s and retirement is just around the corner. In that case, you may be less comfortable with risk and are leaning toward a more conservative portfolio.

Reassess Your Timeframe for Goals 

When you need the money is just as important as your risk tolerance,” says Kelly Luethje, CFP and founder of Willow Planning Group.

Ask yourself questions such as these: What percentage of my portfolio needs to be in a liquid savings account? How much will I need in the next year? In five years? And what portion should be set aside for retirement?

If you’ve recently undergone a major life change, such as a new job, a bonus, getting married or combining finances with a partner, a portfolio review may be in order, explains Luethje. These types of events may mean you need access to money quicker, or they may adjust the timeframe for different financial goals. For instance, if you are getting the wheels in motion to start a new business, you may need to push back your target retirement date slightly.

Consider Rebalancing Your Portfolio

If the mix of assets in your portfolio has strayed from its original allocation, you may want to rebalance your portfolio. What exactly is rebalancing? Let’s say your original mix of assets was 30% bonds and 60% stocks. And stocks performed well in the last year, bringing your share of stocks up to 80% of your portfolio. Conversely, bonds didn’t do as well, and it now makes up only 20% of your portfolio.

As you can see, your current allocation has drifted from what you originally intended. In turn, your portfolio may be too risky or too conservative, explains Ryan M. Mohr, CFP and founder of Clarity Capital Management.

If stocks are doing well, shouldn’t you have more of those in your portfolio? Not quite. When your asset class targets have drifted away from what you had originally targeted, it can lead your portfolio to become overly risky or too conservative. “Rebalancing is a wonderful opportunity to potentially buy asset classes that are down and sell others that may have done well,” says Mohr. “In other words, buying low and selling high.”

However, note that rebalancing should never be done more often than once per year. In fact, rebalancing too frequently increases trading costs and is often counterproductive, explains Wes Shannon, CFP at SJK Financial Planning. “The primary objective of rebalancing is to reduce volatility over time, not increase returns,” says Shannon. So if you’re going to rebalance during the spring, you’ll want to wait at least 12 months before doing it again.

Examine Fees

If left unchecked, high fees can affect your portfolio’s performance and eat up your returns. The less you pay in fees, the more you have for your money to grow. Fees to look for include expense ratios (which are annual fees that come with all funds), portfolio management fees, front- and back-load fees, transaction fees, and annual fees.

“A low-cost approach will keep things simple and avoid mistakes by expensive active managers,” points out Tyler Linsten, an investment advisor and founder of Alder Cove Capital. “It also makes it easy for an investor to keep their eye on the ball, which is letting compound interest work its magic over the long term.”

If your investments reach a certain level, and you can maintain a minimum investment of $10,000, $50,000 or $100,000, you may be eligible to invest in what’s called admiral shares (available from Vanguard). You’ll be paying less in fees. Note that certain retirement accounts may not be eligible to be converted to admiral shares, so you’ll want to reach out to your brokerage to go over the nitty-gritty details.

While you would much rather be cavorting outdoors and enjoying the warmer weather, don’t forget to include your finances during spring cleaning. It’ll ensure your portfolio is in tip-top shape and that you’re well on your way to building your wealth.

This Post Has 2 Comments

    1. Hi MSW:

      They are apparently special types of funds available to Vanguard investors that have a certain amount of funds invested. There’s more information here, but they have lower expense ratios than other funds.


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