Don't hide from your quarterly statement
|By Laura Bruce Bankrate.com
"I have not looked at any of my holdings and I
don't intend to. I don't want to be tempted to jump because I think
I'd be more likely to jump in the wrong direction than the right
one. My advice has always been to choose a sensible, diversified
portfolio and stop reading the financial pages. I recommend the
Quarterly statements from your brokerage account or retirement plan will soon be in your e-mail or snail mail. Unless
you're 100 percent in CDs, money markets or bonds, it probably will look quite dismal. Monitoring your portfolio like a day trader probably
isn't a great idea, but neither is ignoring it.
With major benchmarks such as the S&P 500, Dow Jones industrial average and the Nasdaq 100 all down more than 20 percent
over the past year, it can be tempting to put off looking at what you pretty much know won't be a stellar report.
"Ignoring it won't make it better," says Ed Gjertsen, Certified Financial Planner and vice president at Mack Investment
Securities in Glenview, Ill. "Look at it, face it, wince a little bit and then decide if you're on the right course. Are you too invested?
Everybody wants to take risk as long as the market is going up. But when it heads south people say, 'Well, I didn't want to lose money.'
What goes up, comes down
"If you expect 20 (percent) to 30 percent on the upside, then you have to expect 20 (percent) to 30 percent on the downside.
If a client wants a relatively conservative portfolio, 8 percent upside and 8 percent downside, then you're narrowing the volatility."
Tony Proctor, CFP and president of Proctor Financial in Wellesley, Mass., says "downside capture" can be an indication
that your portfolio needs tweaking.
"If the downside capture on your portfolio is more than 100 percent, in other words, if the market goes down 5 percent and
your portfolio drops 7 percent, I think it's really instructive of a portfolio that, perhaps, isn't diversified well enough or is plain
old overly aggressive. It's times like these when people come to realize how much risk tolerance they really have."
Time and again, advisers tell their clients that the stock market is the place to be if they want to get the return that
can see them through retirement. But the pros make sure their clients have enough cash to cover expenses during volatile times so that
equities don't have to be sold prematurely to raise cash.
Building a retirement cushion
If you're managing your own portfolio it can be easier to short-change your cash savings account because you have bills
to pay. But it's critical to start building a fat cash cushion so you have it when you retire.
"Five years of cash flow needs should be outside of
equities," says Proctor. If you need $100,000 per year to live on
and you have $30,000 coming in from Social Security and other sources
of income, then it's five years of $70,000 that's needed from your
portfolio to supplement your other income."
Five years may sound like a very large cushion, and it is. Some advisers go with three years. Again, your tolerance for
risk will play a role in how much you're willing to stash. But keep in mind that prolonged market downturns are the rule rather
than the exception.
As the market sell-off has dragged on, your stock allocation might be a much smaller percentage of your portfolio than you
intended. Likewise, your bond allocation could be considerably more than ideal. You may want to take this opportunity to rebalance; but be
careful, says Jason Flurry, president of Legacy Partners Financial Group in Woodstock, Ga.
"The market is kind of whippy. As soon as you get
rebalanced, if it bounces right back, you'll be out of balance again.
If it's a retirement account and taxes aren't an issue and you have
the ability to make these changes, it may be OK. Normally, you want
a little wiggle factor from a day-to-day standpoint. I usually give,
depending on the size of the account, anywhere from 0.5 percent
maybe up to 1.5 percent above or below the (original) allocation
before it would warrant rebalancing."
If you're new to portfolio allocation, the Security and Exchange Commission's
Beginners Guide to Asset Allocation, Diversification, and
Rebalancing may help. Even if you're a do-it-yourselfer, you may want to get professional advice now and then.