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7 things to do now to fix your portfolio

Just took another look at your investment portfolio? Feeling a little weak in the knees?

Breathe. Take a deep breath.

That sage advice comes from Chris Cooper, one of several financial planning experts we talked with to find out what you should do to make your portfolio healthy again and what to do to guard against repeating the same mistakes once your portfolio is back on track.

It was hard not to get greedy and invest heavily in technology during the bull market. Now many folks are paying the price for either never having or having had and ditched the tried and true practice of a balanced portfolio.

It's time to regroup.

1. Organize your assets
Now that you've taken a few deep breaths and released some stress, gather your financial records, says Tom Grzymala of Alexandria Financial Associates in Alexandria, Va.

"Organize your whole financial landscape. Know where all the pieces are. If you have an account here and an account there, pull them together. Balance your checkbook. Know how much you have."

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2. Assess your risk tolerance
When it comes to risk tolerance, everybody's different. You need to know what's right for you.

If you really can't stand the ups and downs of the stock market, your investments should be weighted toward high-quality bonds and fixed-income items. Your return will be less, but your money will be safer.

Morris Armstrong of New Milford, Conn.-based Armstrong Financial Strategies says people are learning their risk tolerance right now.

"If you're comfortable with mutual funds and you don't like making the buy and sell decisions, I wouldn't advocate going into stocks.

"If you've reached the end of your rope, it's not worth your health. Your health is the most important factor."

On the other hand, don't let this market downturn keep you out of the market if you can overcome your skittishness and have a long-term horizon.

"I think people learn the wrong way sometimes," says James Knaus of LaBrecque, Jackson, Price & Roehl in Troy, Mich.

"They tend to get burned and stay out of the market when they should be in a much more fully invested position. They take the wrong lesson from it."

3. Allocation, allocation, allocation
How much of your portfolio is in growth or value stocks or bonds or fixed income depends on your risk tolerance, your goals and your time horizon.

Recent figures show billions of dollars worth of mutual funds being sold off. There's no hard evidence as to exactly where that money is going but it's a good bet that many individual investors are selling off their holdings, perhaps their retirement portfolios -- and holding cash.

That could be a mistake, according to Knaus.

"People should re-examine their time horizon and ask if their goals and objectives have changed. If they're the same and the time horizon is sufficiently long, now is an opportunity to secure equities at comparatively attractive prices.

"If prices go down some more, I can buy more as cash becomes available. People should be dollar cost averaging over the next three to six months."

Cooper, of Cooper & Associates in Toledo, Ohio, says the more stock exposure you can stomach; the better off you'll be in the long run. But don't go overboard.

"The '90s made us do sloppy things like put too much money in stocks. We shouldn't have been doing it then and we shouldn't be doing it now. Have a broadly diversified portfolio of U.S. small-, mid- and large-cap stocks, foreign stocks, high-quality government bonds, government agency bonds, corporate and municipal bonds. Stay off the junk."

Remember, generally speaking, the closer you are to your goals the more you should have in bonds and fixed income. You can check for the best deals on CDs and money market funds on this site.

Too many people ditched the bonds and fixed-income portion of their portfolios so they'd have more money for highflying stocks back in those wonderful days of bubbles and irrational exuberance.

Don't make that mistake again.

4. Weeding your garden
You may need to get out the hoe. Get rid of some of the losers in your portfolio, but be careful.

"Don't make paper losses real losses unnecessarily," Grzymala says. "If you're down in GE and you don't need the money, don't sell. If you're down in Lucent, that's another story.

"Consider the tax ramifications of everything you do. What is the tax impact of selling? Remember, losses in IRAs and similar tax-deferred investments are of no use tax-wise.

"Sell those entities, whether at a gain or a loss, that keep you up at night."

5. Pay down debt
Something else that may help you sleep better at night.

"Clean up your credit card debt," Grzymala adds. "If you're paying 16 or 18 percent, take the money out of where it is and pay off that credit card. Give up the 2-percent money market account and pay off the 16-percent credit card."

6. Build an emergency fund
It used to be that experts recommended having three to six months living expenses to meet cash emergencies.

Given how much people are hurting financially these days, folks meeting that advice are probably in pretty good shape.

But in this ugly environment of layoffs and long bear markets, it might be wise to extend that timeline. Again, it depends on your situation: how safe your job is, how close you are to retirement.

Morningstar senior analyst Peter Di Teresa says don't take chances with money you may need within three years.

"Invest more heavily in bonds and CDs for anything up to three years. Anything longer than a short-term bond is risky for that short time period. It seems unlikely that interest rates will go down from here. If rates go up, longer-term and even intermediate bonds will be hurt," says Di Teresa.

7. Get professional advice
Picking a winner for your portfolio was a heck of a lot easier during the bull market. But a sound portfolio goes beyond that. Having a professional analyze your overall financial picture and devise a strategy for you can be worth the cost.

"It's hard to make decisions as to what to buy or sell. Maybe you should be doing some selling for tax purposes. It's best to have professional advice," says Di Teresa.

"Work with a fee only planner; someone who's not compensated by commission. The fee will be different for different people, but you know what you're paying for and that your adviser isn't motivated by commission."

Look for recommendations from people you know. If you don't know anyone who has consulted an adviser, check with some of the associations such as the Certified Financial Planner Board of Standards and the Financial Planning Association.

No one knows when this bear market will quit growling and the bulls will start running. People have been wondering for more than a year when the market will bottom. When the turnaround does come, it could be very slow. Be prepared.

"Maintain your patience in the market and in yourself," says Grzymala. "Maintain the discipline you have and keep faith in the future and in yourself."

-- Posted: July 23, 2002

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See Also
Patience is an investment virtue
QUIZ: Do you know your risk-tolerance?
Investing glossary
More investing stories

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