Reevaluate Your Portfolio

Portfolios should be evaluated periodically. Although most advisors suggest you analyze your portfolio on a yearly basis, I prefer to look at mine every six months. I do so for two reasons. One is to determine whether I am on the right path to reach the investment goals I outlined when I initially created my portfolio. The other is to accommodate any changes in personal circumstances.

The investment landscape is constantly changing, so it is to your benefit to see whether your investment objectives are still along the lines of what you originally intended them to be.

So how do you know whether you are on the right path?

1 Reexamine your initial investment objectives and ask yourself whether your portfolio is meeting those objectives. If you are close to or higher than your initial objectives, you are in good shape. If not, the last thing you want to do is panic and make a snap decision. Instead, in the most detached and positive way, think about why your portfolio is not meeting your objectives. For example, it is possible the entire equity market is down, which could be the reason behind the lower-than-expected returns.

2 Measure your portfolio performance against a relevant benchmark. Your portfolio may be made up of individual stocks and mutual funds. Analyze each of the stocks and funds that make up your portfolio and determine whether they are outperforming or underperforming relative to similar securities.

3 If your investments are outperforming or in line with their benchmark, you are in good shape. If they are underperforming, however, you should be concerned.

For example, suppose you own a large-capitalization portfolio consisting of stocks and mutual funds and its performance is similar to the example displayed in Figure 1. It doesn't look good.

FIGURE 1: PUNCHING UP YOUR PORTFOLIO. If your investments are outperforming or in line with their benchmark, you're in good shape. If your portfolio's underperforming its benchmark, however, you should be concerned, as you should be in this example.

Since your portfolio is underperforming the large-cap broader indices, it's time to be concerned. In fact, it's time for you to take apart your portfolio and do an in-depth analysis on each of your investments.

FIGURE 2: RUSSELL 2000 INDEX VS. BERGER SMALL CO. GROWTH INVESTMENT. Suppose you own a small-cap growth fund such as the Berger Small Company Growth Investment fund. An appropriate benchmark to compare this against would be the Russell 2000.

To start, compare your investments against an appropriate benchmark. For example, suppose you own a small-cap growth fund such as the Berger Small Company Growth Investment fund. An appropriate benchmark to compare this against would be the Russell 2000 (Figure 2). It doesn't look as if this fund is decreasing the value of your portfolio, so take a look at another investment. Suppose you own 100 shares of Microsoft Corp. (MSFT), which you have been holding since October 18, 1999. Compare this stock against the Nasdaq Composite (Figure 3). A quick look at this chart reveals this stock is underperforming the market.

FIGURE 3: MICROSOFT VS. NASDAQ COMPOSITE. Compare Microsoft against the Nasdaq. A quick look at this stock indicates that the stock is underperforming the market.

STRATEGIZING

After identifying investments that are underperforming their benchmarks, what should you do next? Should you sell them or continue holding them? Your decision to sell stocks should be just as calculated as your decision to buy. Unfortunately, too many investors overlook this factor.

One of the most basic rules of thumb is to sell a stock or fund when it stops behaving the way you believed it would based on your research and analysis. If you purchase shares in a hotshot new company and expect the company's stock to continue making a 50% improvement in earnings year after year, it may be a good time to consider selling those shares when those earnings reports start to show a significant dropoff from your expectations.

The important factor is to use the same criteria for buying a stock as you do for selling it. If you buy shares in a company after conducting exhaustive research into a company's fundamental financial conditions and discover that it's sound with a positive outlook, then it would be foolish to decide to sell those shares simply based on a short-term review. Along the same lines, if you have shares you acquired after watching their price movement on a chart for weeks or months, then you should not necessarily be swayed by an earnings report that barely meets estimates.

Another major factor to keep in mind is time. If you have purchased shares in a company or a mutual fund as part of a long-term investment strategy, then your focus should be on long-term threats to your holdings, not short-term fluctuations. Even the best companies -- Wal-Mart, Cisco Systems, Home Depot -- went through rocky times en route to producing sizable returns for their shareholders. Be wary of buying for great reasons, only to turn around and sell for petty ones!

If you are looking to buy shares for the short term -- say, under a year -- then there is little time for fluctuations. One bad move could ruin your entire short-term portfolio! In cases like these, decide how much money you would be able to tolerate losing without having it affect either your material well-being or your sense of self-worth. That amount should be your line of last defense, and a stock that retreats beyond this line should be among the first you consider selling.

In general, if the price is declining, earnings are declining, and the overall market is accelerating, it would probably be worthwhile to sell. The primary reason to sell a stock would be to improve your potential and protect your assets.

CONCLUSION

Monitoring your portfolio takes considerable time and effort. The larger your account, the more time and effort you will need to expend. If your account is less than $10,000, you can probably monitor your own account, but anything beyond that would require consultation with financial professionals.

Even if a professional manages your portfolio, it's still a good idea to keep an eye on it. There are several software packages, the two most popular of which are Intuit's Quicken and Microsoft's Money, that will help you analyze your portfolios. All you have to do is enter the data. Until the next time you have to evaluate your portfolio, relax. You can be at peace, knowing your money is working for you.