Managing Your Investment Portfolio

As a former stock analyst, I often get questions about what stocks to buy or how to manage an investment portfolio. I am not going to recommend specific stocks in this blog because I believe there is already an overwhelming amount of financial advice on the web and because I no longer follow individual companies closely enough to make recommendations with conviction. But I do have some suggestions on how to manage your investment portfolio.

  1. Know what you own – Older adults with upper middle incomes or higher have typically amassed a portfolio pre or post retirement that includes cash, stocks and bonds. But the portfolio is often spread across a variety of bank and brokerage accounts, certificated of deposit (CDs), investment retirement accounts (IRAs), 401k’s and other investment vehicles. In my experience it is not unusual for individuals or couples to view each of these investments as discrete investments, perhaps focusing on the one or two largest account, rather than taking a complete inventory of their total investment portfolio at least once or twice a year.
  2. Limit the number of accounts in which you hold assets – While shopping on line for the best CD rates and using an online brokerage account to trade stocks, while maintaining other accounts for IRAs and 401ks, may save you fees, I have found the complexity multiple accounts adds to managing a portfolio often leads to less well informed decisions on your overall portfolio and often represents false economy. If you insist on using multiple accounts, and particularly if you have six or more, it is essential that you keep a financial inventory where all accounts and passwords are kept, regularly update it and share it with others. It is also essential that you brief your spouse and heirs on where this information is located and be sure they can readily access it in the event of your death or disability.
  3. Decide on an asset allocation that works for you – Even though I made my living for many years recommending stocks to institutional investors, I was generally prevented from owning any of the stocks that I followed as an analyst. The primary way I managed my own portfolio was to focus on an overall asset allocation – the percentage of stocks, bonds and cash I wanted to hold. Then within the stock portion of the portfolio I considered the percentage of large, small and mid cap and international stocks I wanted to hold and whether I wanted to own individual stocks, managed funds, or exchange traded or index funds. In the bond portion of the portfolio I considered the maturities I wish to hold and again how I wished to gain exposure to bonds. There are many suggested asset allocations by age online, as well as asset allocation tools that allow you to enter your age and other information before recommending an allocation for you. One traditional rule of thumb is that the amount of bonds in your portfolio should equal your age but with increased longevity and current low interest rates many advisors consider “Percentage of Bond = Age” be too conservative. The conservative end of the T. Rowe Price asset allocation model, to use one example, suggests 60% stocks/30% bonds and 10% short-term investments (cash or cash equivalents) for an investor in his or her 50s, 50% stock, 35% bonds and 15% short-term investments for an investor in his or her 60s and 20% stock, 50% bonds and 30% cash for an investor in his or her 70s. But even within the T. Rowe Price model the mix of bonds and stocks can vary a good deal dependent on your risk tolerance and your life expectancy and I am more aggressive in my personal allocation to stocks than the conservative end of the T. Rowe model suggests. Asset allocations can also address the mix of large cap, small/mid cap and international stocks in a portfolio but an in depth discussion of stock allocations is too long for this blog post. The best way to get a sense of the asset allocation that is right for you is to review a number of different allocation models and think about how your own personal circumstances and risk tolerance fit with one or more of these. Discussing asset allocation with a broker or financial advisor in which you have confidence can also be very helpful.
  4. Use asset allocation to reallocate your portfolio at least once a year –I highly recommend using asset allocation as a tool to rebalance your portfolio on a regular basis.   This forces you to avoid the pitfall of most investors, which is an unwillingness to buy when valuations are low and sell when valuations are high.  There are three steps in using asset allocation to rebalance your portfolio.  The first is to determine the mix of stocks, bonds and cash or cash equivalents in your existing portfolio.    This is not as easy as you may think because many mutual funds may combine both stocks and bonds within an single account and may also hold a portion of cash at any given time.    Getting the details on each account can sometimes get difficult, particularly if you want to do a more refined asset allocation, separating out large cap from small, mid-cap and international funds and perhaps separating out real estate investment like REITs from other types of stocks.    This is one of the reasons I prefer fewer accounts and it is something a full-service broker can do for you.    The second step is to compare your actual asset allocation to the allocation that you believe works for you and the third step is buying or selling stock or bonds to move your allocation back toward the model allocation you selected.    Shifting the allocation does not have to be done all at once but you should have the discipline to implement it over a relatively short period of time if you want to use  asset allocation to manage your portfolio.

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