Reassessing your investment portfolio |
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The purpose of this isn't to tout one particular financial planner but rather to show, among other things, the importance of determining the right mix and rebalancing as needed. Flurry's results have come from years of education and experimentation. It's not easy, which is why so many do-it-yourselfers rely on the typical "style" boxes -- large cap, small cap, value, growth, etc.
"When you're dealing with the three factors -- how much market exposure you have -- stocks versus bonds, how many small companies versus big companies, how much growth versus value as far as the way the portfolio tilts, then you don't necessarily live in those tic-tac-toe boxes," Flurry says.
"We don't care so much about midcap blend and small cap value. It's how much stock do we have versus bonds and then, within that stock portion, how much is large and small and how much is growth and value. I can't control the market but I can control how much risk exposure we take. If we keep that consistent, we can back into an expected reasonable rate of return."
Taking out the dogs
Rebalancing a portfolio involves selling winners, or at least taking partial profits, and figuring out what to do with the dogs in your portfolio. Profit-taking helps reduce risk and it's surprisingly difficult.
"For some reason, the profit-taking discipline has
been ignored, even by experts. It's a lot easier to just buy and
hold and say I bought a good company and I'm going to ride it through
thick and thin," says Alan Lancz, president of Alan B. Lancz & Associates
and LanczGlobal LLC in Toledo, Ohio.
"The main complaint of new clients about their previous
financial planner or broker is that they felt no one was really
watching their portfolio. They'd be good at buying, but there would
be no real strategy to get out. Many times they rode specific investments
up, the market would correct and they'd ride it back down. It's
one of the most frustrating investment experiences you can have.
It might even be more stressful than losing it from the beginning,
because when you have tremendous gains and you watch them wither
away, it's really difficult to take."
Lancz says he learned early on about the discipline
of setting up target price ranges, so you have an idea of when to
get out of an investment. As a stock price is rising, it's easy to
let greed rule your decisions. The stock price falls and you let
yourself think, it's a great investment -- the drop is temporary.
Next thing you know the stock has lost serious ground. Lancz stresses
the importance of protecting yourself on the downside, as well when
a stock tanks shortly after you buy it.
"We don't usually get involved in an investment unless we see three to four times the reward potential as the risk. So, if we're buying something at $20 and we think it's worth $35, we want to make sure that we don't see it going lower than $15 or $16. We're taking a 20 percent or 25 percent potential risk for the potential of making three to four times that on the upside."
There are many who will argue that the "buy and hold"
philosophy of investing is dead thanks to market manipulation, day
traders, hedge funds and the like. You don't have to throw in the
towel, but you do need to be proactive and set aside time to monitor
your investments. If you decide to hire a financial adviser, be
sure that he or she has a plan to protect your portfolio.
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