Has your portfolio been smacked in the last little while? Do you see the market going up and yours is losing money or just not keeping pace?
Investing is a balance between risk and reward and if your portfolio is going in the opposite direction of an upwards market then your risk and reward is out of whack. You need to stop the bleeding. If that sounds like you, then implement these four steps and you will be on your way to better portfolio returns.[ad#tdg-embedded]
1. Evaluate your asset allocation
Your first action should be reviewing your asset allocation. Do you have an asset allocation strategy? If not then that may be your problem – your portfolio is not set up to meet your goals or do the work it is supposed to do.
Action #1: Head over to Index Fund Advisor (Ifa.com) and take the Risk Capacity Survey to better understand your risk profile and then put it into action.
Action #2: Read this book: The Investor’s Manifesto. It is an excellent book on building a portfolio.
2. Check the fees you are paying
The largest enemy of investors, apart from a poorly put together asset allocation is a portfolio that pays too much in fees. Fees can come from many places, including management expense ratios (MERs) on mutual funds or straight up high brokerage commissions. If your mutual funds or index funds have MERs north of 1.00%, then evaluate the performance of those funds and consider switching to another lower cost alternative.
Action #3: Review your portfolio for funds that pay MERs over 1%, evaluate their performance, and consider switching them.
3. Evaluate the dogs that are bringing your portfolio down
Your portfolio may be down because you have some real poor performing funds in your portfolio. At the end of the day, there should be no reason for an investor to lag the performance of the overall stock market. Have a look at your portfolio, see which of your holding is down significantly and determine the reasons for that. If you see no hope of things turning around, then cut your losses and find a better alternative.
Action #4: Find the dogs in your portfolio and determine if a turnaround is going to come – be honest – if not then make a change.
4. Slowly switch your assets to index funds for the core portion of your portfolio
As I said above, there is no reason for an investor to lag the stock market these days. With the index funds available that track the whole market like the Vanguard Total Stock Market ETF (VTI) or Vanguard Short-Term Bond ETF (BSV) an investor can easily meet the market returns.
My general advice to people (although I don’t give advice!) is that investors should build a core asset allocation based on their risk profile of solid index funds and then go from there if they want. This way you have a better chance of tracking the market and not getting smacked by individual positions.
Action #5: Build a core portfolio based on an asset allocation that meets your risk profile needs. Use low-cost index funds to do this.
Summary
To get your portfolio back on track if it is down or lagging the market, these 5 action steps can move you closer to your goals.
This is a perfect post: you stated things perfectly and clearly. I was wondering, since I also blog about finance, do you think we get many people who look at our blogs and ask, “What is an index fund?” It sounds so elementary, but I give seminars to really smart people who can’t tell what a bond is, what an actively managed fund is etc.
I’ve recommended some really simple books to friends as well, and when I ask them about them (Like Bogles Little Book of Common Sense Investing) they admit that they were lost–and couldn’t understand them.
As finance bloggers, I wonder if we should try creating the simplest definitions of terms we can, and having them available to readers on our blogs. Who knows? Maybe it would grab and educate new readers. What do you think?
#2 and #4 resonate with me. I particularly like the ideas of VTI and BSV. Thanks for those.
As for fees (grrr) I have found that some brokerages will charge an annual fee if you have very few trades (as I do and as you would expect in a buy-and-hold scenario).
Great post, nice and simple. Like David, #2 and #4 ring true with me.
@Andrew – you are onto something. Consider it a “Blogger’s Financial Glossary”; keeping the definitions for financial terms short, clear and concise. People who don’t have any passion (or interest) in personal finance, won’t read personal finance books…but folks should have time to digest and understand a few key terms. I think the book you are working on, should have an entire section devoted to terms and definitions…you know, something you can skim through before you sleep on Buffett’s sofa?!
Nice post! I think #3 hits home with me a lot. Often, I think investors buy particular investments that can fall out of their comfort range (such as low cap growth stocks) and tend to stay the course even though the investment is lagging the portfolio down. Sometimes, its important to realize when a mistake has been made, the lesson has been learned, and to cut your losses. Stubborn pride can be a disaster for one’s portfolio; instead, by realistically assessing your portfolio from time to time can yield some positive results.
As for a handy glossary, I’ve come across one that isn’t too bad and could be good for beginner investors that would like to get acquainted with terminology. It’s on the Investors Association of Canada; here’s the link: http://www.iac.ca/InvestGlossary.asp
Cheers