Your investment portfolio and your closet have more in common than you thinkMarch 7, 2019
Every spring, your closet gets an overhaul, so why not your investment portfolio? In doing so, you can achieve clarity on how much risk you’re taking, a realistic idea of the growth you can expect, and the confidence that comes with knowing you actually have a strategy, rather than a heap of investments that resemble what may be lying on your closet floor.
Assess the situation
Before you start moving anything, it's important to understand the scope of what you're trying to achieve. Spend some time thinking about your life goals and what's truly important to you to help come up your financial priorities.
It is also a good time to review and make note of any substantial changes that have taken place in your life that may affect the asset allocation strategy of your investment portfolio. By identifying any important lifestyle change, you can see how they affect your current investment-planning objectives. Things like career shifts, health considerations or children’s education expenses are all factors that may change your tolerance towards investment risk or affect the investment balance you want between capital preservation and growth. For instance, you could have too much of one investment and too little of another. This could mean you are taking on too much risk or, conversely, that your holdings have become too conservative to provide the growth you need. As a result, some important re-balancing could be required to get your relative weightings back in tidy order.
As with your closet, the first step to spring-cleaning your portfolio is to determine what you own and why you own it. Ask yourself: What role does it play in my portfolio? Whatever it does, make sure you don't have too much doing the same job.
Put things back in order
Many of us may have unkept closets because over time we’ve haphazardly tossed items into them. Although nothing may need to be to be thrown out, a sufficient clean-up is a good idea to put things back in proper order. Just like with your portfolio, a good spring shake-out may be needed.
When you’re spring cleaning your portfolio, it’s a good idea to take a close look at how it’s divided up between stocks, bonds, cash and other investments. You may have a hodgepodge collection of investments with no rhyme or reason behind them. And, if you find that your investments are skewed in the wrong direction, rebalancing can help you get back on track.
Trim back your redundancies and diversify
If you look through your closet carefully, you might be surprised at how many items serve the same purpose. For example, do you really need two black turtlenecks? There may be similar duplications with your investment portfolio. Rather than holding on to two stocks that are similar products, it may make more sense to swap one of those for a different company in a different sector, which would boost your diversification. Although there is no guarantee that diversification can generate a profit or preserve capital, it may help reduce the effects of market volatility.
Diversification plays an integral role in any investing strategy because it allows you to spread out your risk. If stocks make up a majority of your portfolio, you could be in for an unpleasant surprise if the market spirals downward. While you are adjusting your portfolio for the remainder of the year, it’s ideal to fill it with different asset classes. Doing so can help to insulate it from market volatility.
Managing your asset allocation is all about balancing risk against reward. If you’ve been neglecting your portfolio for a few months or even years, your investments might not align with your current goals. Without even realizing it, you could be shortchanging your returns or taking on more risk than you really need. By spring cleaning your portfolio, you can help to make sure your investment holdings are up-to-date, appropriately suited to your needs, and well-positioned to help you make progress toward your long-term financial goals.