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It's been said that legendary investor Warren Buffett can recite five years' worth of entries in his personal checkbook. You can bet he takes a similarly attentive approach to managing his personal investment portfolio.
While it would be tough for anyone to match Buffett's savvy, it's easy to follow his lead by actively monitoring and maintaining your own finances and investments.
What's the current value of your brokerage accounts? What percentage of your portfolio is allocated to stocks? Is your net worth increasing or decreasing? The answers should come easily. If not, it's highly likely that your investment portfolio will fall out of step with changes in the markets and in your life. The result can be disastrous, undermining even the best-laid plans and jeopardizing your financial goals.
"We've recently launched a campaign to encourage customers to actively manage their portfolios," says Brian Murphy, a senior vice president at Fidelity. The effort includes new planning tools, Web content, and other educational resources to help investors in a wide range of life stages.
1. Check in quarterly.
Markets can be volatile. There is no need to get caught up in the day-to-day movements of your account balances, but don't ignore them completely. Carefully review all your account statements when you receive them.
"You should look at your account balances at least once a quarter," says Murphy. "And opening your monthly statements is always a good idea, just to make sure things are on track." Don't make the mistake of benchmarking your portfolio against popular indexes such as the S&P 500,® the Dow Jones Industrial Average, and the Nasdaq Composite Index. Although these are widely cited, the performance of these groups of stocks applies, at most, to only one portion of a portfolio that is likely diversified among stocks, bonds, and other types of assets.
The more relevant benchmark is your own financial plan. If your portfolio is providing a return that will allow you to reach your financial goals while maintaining an acceptable level of risk, then it is on track, no matter what the broad stock indexes are doing.
2. Rebalance annually.
At least once a year you should examine whether your actual asset allocation remains consistent with your target. If, for example, stocks have been outperforming lately, they may now constitute a much larger portion of your portfolio than you had envisioned. If the difference between your current stock allocation and your ideal mix is a few percentage points, it's probably not worth worrying about. But any deviation that is approaching 10% is a good signal that it's time to rebalance. Rebalancing is the process of bringing your portfolio back to its original proportions. Typically, you achieve this by selling some assets that have performed well and using the proceeds to buy more of those that have been lagging. It may seem counterintuitive to sell your winners, especially if they are still doing well. Nevertheless, it may be a smart move. .
"Rebalancing has a built-in benefit for people who don't have a brilliant strategy for when to sell," Murphy says. "It forces you into a discipline of buying while prices are relatively lower and selling when they are relatively higher."
3. Avoid market timing.
When storm clouds gather over the market, it can be tempting to sell everything and sit on your cash until things clear up. This is a tactic called market timing, and it is difficult to pull off successfully. Market timing exposes you to two major risks: exiting the market too early and reentering it too late.
4. Plan for life changes.
The right mix of assets in your portfolio will change as you get older and as your needs change. It's important to anticipate these changes and build them into your financial plan. As you get older, for example, your tolerance for risk may change, and you may decide to own fewer stocks and boost your holdings of bonds.
If you can accomplish this shift gradually, by building it into your annual portfolio rebalancing, you'll avoid the need to quickly sell assets in order to alleviate a cash crunch. "Having to sell at an inopportune time can really sabotage a portfolio over the long run," says Patti Brennan, a financial adviser in West Chester, Pa.
5. Don't overmanage.
Your portfolio may not always perform up to expectations, but buying and selling are not necessarily the right response to every bump in the road. Too many transactions can generate commissions, taxes, and other expenses that can diminish your returns.
Instead, if you're worried about a particular investment, ask what has changed since you first decided to buy it. If a company suffers from the failure of a key product or if a mutual fund strays from its tried-and-true strategy, those may be reasons to sell. But realize that even the best stocks can hit a rough patch, and top mutual funds can lag the market or their benchmarks for periods of time. If your original thesis about an investment is still intact, it may be best to stick to your conviction, hold it for the longer term, and continue to monitor it closely.
By David Landis
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