3 signs your investment portfolio needs a makeover

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The stock market has been hitting new highs throughout 2021, and the bull market has been raging since the Federal Reserve dropped interest rates to near zero in March 2020 as part of its efforts to fight the economic effects of COVID-19. But the investment portfolios of many investors may be stuck in neutral despite the surging stock market.

Here are a few signs that your portfolio needs a makeover — and some steps you can take to get back on the right track to financial prosperity.

How do you know your portfolio needs help?

Here are signs that your portfolio may need some adjustments to help it work better for you.

1. Your portfolio never seems to move

It’s one thing if your investment portfolio doesn’t move when the market is stagnant, but in the middle of a soaring bull market your portfolio should be moving higher — even if it doesn’t keep up with the S&P 500 index, the benchmark for the stock market.

If your investments are not moving up, you may be playing it much too conservative, with low-return assets, or you may simply have the wrong investments for this economic climate. You may be invested too heavily in bonds or money market funds, both of which offer low returns. If you’re risk-averse, you’ll end up with very low returns, even if you have a great saving discipline.

2. Your portfolio is all bonds all the time

Another sign that your portfolio needs work may be that it’s all bonds all the time.

To be clear, bonds can be a good way to provide stability to your portfolio, steadying it during tough times and even regular environments. And a heavy helping of bonds for retirees is standard advice, making it easier for them to keep their wealth while generating income they can use.

But bonds are not usually the best way to build wealth — especially with today’s low interest rates. For those individuals with a decade or more until they need their money, an overallocation to bonds may stunt your portfolio’s growth and squander your most important wealth-building ally: time.

3. Your portfolio is highly volatile

A portfolio that never seems to go anywhere is one thing, but at the other extreme is a portfolio that bounces around. One day it’s up 10 percent, but the next day it’s down the same amount.

That kind of volatility is likely a sign of a couple things: (1) A portfolio that owns highly volatile or speculative assets such as Bitcoin, cryptocurrency, biotech stocks or electric vehicle stocks, among others, or (2) A portfolio that owns these volatile assets in a too-high allocation.

What can you do to fix your portfolio?

How you might fix your portfolio depends on what exactly is ailing it. Fortunately, there are many options to add a little more zip to your returns or mellow out a too-aggressive portfolio.

1. Add some balance to your portfolio

Putting balance in your portfolio can be relatively straightforward: If you have risky assets, you can add safer ones, while you can spice up a bland portfolio with a higher allocation to stocks.

If your portfolio has too much allocated to bonds, you can add exposure to stocks through an index fund. This kind of fund may give you a diversified allocation to stocks, and a good pick is an ETF based on the S&P 500 index such as the Vanguard S&P 500 ETF (VOO). This list of best index funds gives you further ideas along the same lines.

On the other hand, being too conservative might not be the issue, and a portfolio that has too much in risky assets could be a concern. If you have very risky assets, a S&P 500 index fund could add some stability to the portfolio or you could add even more stability by adding a bond ETF to the mix. A bond ETF will settle your portfolio, but at the cost of long-term returns.

2. Pick a long-term plan and set it on autopilot

A portfolio that seems to go nowhere may also be a result of an investor who does too much, especially trading in and out of the market. That kind of active investing may lead the investor to chase the latest hot investment, and leads almost inevitably to buying high and selling low.

The solution here is to pick a solid long-term plan and then set it on autopilot. A human financial advisor can help you set up a strong long-term plan, but you can also get lower-cost help from one of the best robo-advisors. A robo-advisor makes it easy to stick to a financial plan, because all you’ll need to do is deposit funds and the robo-advisor manages everything else.

But the big point is: Pick a workable plan and then set it up so that you have little involvement. The more you can automate your investing strategy, the better your returns are likely to be.

3. Add stock exposure – but not too much

An S&P 500 index fund is a great choice if you’re looking to add some extra returns to a bond- or cash-heavy portfolio, and it can even settle down a still-riskier portfolio (for example, one that has crypto assets or commodities). If you’re investing in a handful of individual stocks, this kind of index fund can add diversification and reduce your portfolio’s overall risk.

But sometimes too much of a good thing can be too good.

For example, you want to be careful if you’re invested in all stocks and need to access money in less than five years. The volatility in stocks, even an S&P 500 fund, could mean that you might have to sell even when stocks hit a low point. And if you’re nearing retirement and you’ll need money, you’ll want to carefully plan and likely add some bond exposure for stability and income.

4. Invest money in the market regularly

Wealth is built over decades, not by happening to buy a few stocks at exactly the right moment. As the old saying goes, “Time in the market is more important than timing the market.” In other words, you want as much of your money in the market working for you as long as possible.

It’s great to start investing with a chunk of money, but you’ll need to cultivate a saving discipline so that you’re able to regularly add money to your investments. You’ll begin to roll up a sizable portfolio that you’ll be able to tap later on. In fact, this is the principle that 401(k) plans use, by drawing money from each paycheck.

Plus, through this approach you’ll get the benefit of dollar cost averaging, reducing your risk.

5. Resist the temptation to look at your portfolio every day

When you’re making money, it can be easy to watch the market every day (or week or month) to see how much you’re earning. But when your investments go down — and they inevitably will — you’ll be tempted to sell because you want to avoid the pain of losing money.

And selling can be the worst thing you can do for your long-term returns. If you’re selling for a capital gain, you’ll pay taxes (unless you’re in a tax-advantaged account such as a 401(k) or IRA.) Taxes will ding your returns, but selling also means you’re out of the market and are unable to make a return on your money. Those who sold in March 2020, as the market plunged during the advent of COVID, likely missed out on the huge gains since then.

It can be helpful to not look at your investments too frequently, if it scares you into making a rash move. The long-term research is clear: Passive investing tends to beat active investing.

Bottom line

If your portfolio seems to never perform well, it may be time to shake things up and start making the moves that lead to long-term wealth. You’ll need to diagnose what may be leading to your underperformance and then come up with solutions to fix it. If you don’t want to manage your money yourself, hiring a pro can be worth the money and may pay for itself many times over.

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Written by
James Royal
Senior investing and wealth management reporter
Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
Edited by
Banking editor