|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.
TAKE ANOTHER LOOK AT YOUR PORTFOLIO
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.
LAST YEAR'S PERFORMANCE: A SECOND LOOK
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.
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.
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.
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 Working-Money.com.