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Is It Time To Clean Up Your Portfolio?

05/18/05 11:17:04 AM PST
by John Devcic

Are you busy putting away those winter sweaters and coats and straightening out the closet? Maybe it's time to do the same with your portfolio and yes, it can be just as easy as cleaning out your closet. And maybe even less onerous.

Usually, right before summer hits, people tend to clean out all of the clutter in their homes. Generally referred to as "spring cleaning," it is an effective tool for the home — but it may not be a bad idea for investors to also look at it as a tool for their personal portfolios. Before embarking on such a task, you need to keep a few things in mind. In this article, I will discuss some ideas that you could adopt when the time comes to clean out your portfolio.

In this day and age, we are confronted by a constant barrage of information, so it's best not to be distracted by what others are thinking of the markets. So turn off anything that will bring you news about the markets. Don't listen to or watch any TV channels that discuss personal finance, don't read anything that has to do with someone's opinions of the market, don't answer any calls from brokers... you get the idea. Once you have freed yourself from all the distractions, then you can get to work.

You want to start with your entire portfolio, regardless of how big or small it is. It's important for you to get the big picture, so look at all your stocks, mutual funds, most recent bank and brokerage statements, retirement accounts, and so forth. Are your assets allocated efficiently? Is your portfolio properly diversified? One thing to keep in mind at this early stage is the adage of not keeping all your eggs in one basket.

I have a friend who is in love with technology stocks, and as a result, more than half of his portfolio is made up of tech stocks. This is clearly a case of not having a properly diversified portfolio. It may work in your favor if that particular sector is doing well, but what if it isn't? It's at times like these when you realize that spreading out your investments over various sectors or asset classes can be beneficial. By diversifying your portfolio, you are protecting your assets from the losses of one sector that could affect your entire portfolio. If you are overweighted in one sector, it is time to get rid of some of them and lighten your exposure.

Another thing to look for is if your portfolio contains stocks that have been declining or worse, not moving at all. If so, it may be time to take a second look and reexamine why you own those stocks. You may find it difficult to cut a stock loose when it has been going down or not moving at all. Yes, it may go up later, which would mean you would at least be better off selling at a higher price, albeit slight. It is also difficult to admit that you made an investment mistake. But wouldn't you rather have your money working for you now rather than later? Think about it: You could have put that money into a savings account that could be earning a small interest. In the end, the best thing to do is put your pride aside and do what is best for your portfolio.

Keep in mind that your intention of cleaning up your portfolio is to put your money where it can work better. If you still find, in your portfolio, some of those once high-flying stocks that are now down in the dumps but you can't find the heart to sell them, now may be the perfect time to do so. Think of it as throwing out those old shoes that don't fit anymore but they're taking up space anyway.

Did you use a particular trading strategy last year? If so, how did it work for you? Did you generally do well in your stockpicking, asset allocation, and so forth last year? If you answered yes, then all you may need to do is refine your trading strategy. This you can do by looking at those areas where your investments didn't do well and try to understand why you made those choices. Perhaps you do not use a specific trading strategy, and if this is the case, it may be a good time to adopt one.

Further, consider taking some time to review some simple technical analysis tools and try to come up with something that is based on your own trading style. This could be something as simple as using a simple moving average. The major reason you want to consider using a trading strategy is to remove as many of the emotionally backed trading decisions as possible. When it comes to buying and selling stocks, or any security for that matter, emotions can only take you so far. This website is filled with different strategies that you can use to help you out this year; find the one that most closely matches your style of trading.

Are you happy with your current broker? Your broker should be your ally, especially if you are using a live broker to make your trades. Whether you use a live broker or one online, the fees can be robbing you blind. When it comes to online brokers, you have to take into account two main factors. First, take a look at how many trades you made last month and the month before. Most brokers allow you to become a premium member and will give you discounts on how much each trade will cost you based on the number of trades you do each month.

Another factor to consider is how much you are being charged for each trade. Commissions vary among brokers, so you need to look at what you are getting in relation to what you are being charged. If you feel you are not getting what you need, you may want to look elsewhere. There's a plethora of brokerages to choose from.

I'm sure most of you have been in a situation where you have taken — or at least been tempted to take — someone's advice about buying a stock. I am not against taking someone's advice, but you should never take advice about buying stocks blindly. If you feel that a recommendation is valid, then it's important to reinforce that recommendation with some research. Bring up a chart of the specific stock or fund going back at least five years. Determine the direction of the trend, or the next support or resistance levels, or whatever jumps out at you. These are used to identify your entry and exit points. If you like what you see, your next step will be to determine if it fits your investment style. Will it be a good short-term investment or is it better to buy and hold it for a long period of time?

Just because it is a good investment doesn't mean it is a good investment for you. If you are conservative, you certainly will not be very comfortable owning something that is a high-risk investment. By doing your own research you'll be able to follow, in your opinion, your own recommendation, even though initially someone else made the recommendation.

It's important to take a step back and turn off all distractions that would keep you from focusing on your personal financial goals. Get yourself organized; get all your information at the tip of your fingers so you can easily make the decisions about your portfolio. Whether the information is online or on paper, make sure you have it where you can easily access it.

Again, if you aren't using a trading strategy, consider using one. Make sure that your broker is working in your best interests. Finally, remember that if you are going to put your money somewhere, do your own research and make your own decision about your investments. It's best to stay away from errant advice. When it comes to cleaning out your portfolio, you must remember to be ruthless and that means keeping all the points discussed in this article in mind.

John Devcic is a freelance writer, a market observer, and a historian.

Current and past articles from Working Money, The Investors' Magazine, can be found at

John Devcic

John Devcic is a market historian and freelance writer. He may be reached at

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