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
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
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
"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,
"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,
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
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