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.