A new year offers a fresh start. That’s why so many of us begin it with a few resolutions.
Here are three that every investor would be wise to adopt.
1. Rebalance Your Portfolio.
After a nearly six-year, rip-roaring bull market, you almost certainly have a larger percentage of your portfolio in stocks than you did a few years ago. That means it’s time to lighten up.
Start by looking at your total asset allocation. Gather up the statements for all your bank accounts, retirement accounts, brokerage accounts and mutual fund accounts and determine what percentage of your total investment capital is in stocks, bonds, cash, precious metals, etc.
[ad#Google Adsense 336×280-IA]The Oxford Club recommends that you have 30% each in U.S. and international stocks, 10% each in high-grade bonds, high-yield bonds, and inflation-adjusted Treasurys, and 5% each in real estate investment trusts and gold shares.
This ensures that you are diversified among a number of non-correlated investments and own a piece of each year’s best-performing asset class.
(In 2014, that was definitely large cap U.S. stocks.)
Your asset allocation is your single most important investment decision. But to do it right, you have to rebalance once a year. Bring the percentages above back into alignment by selling some of the asset classes that have appreciated the most and putting the proceeds into the laggards. A contrarian strategy? Absolutely. This adds to your returns by forcing you to sell high and buy low. It also reduces your portfolio’s volatility.
2. Check Your Investment Costs.
It’s a sad fact of life that most investors haven’t the foggiest notion what they’re paying in total investment costs each year. That’s because so many fees are hidden. This is especially true if you own actively managed mutual funds, annuities or life insurance policies.
All things being equal, higher investment costs mean lower net returns for you. Don’t let your broker tell you his investment products justify their fees. Chances are they are not even matching – much less beating – an unmanaged index. (Three out of four mutual funds don’t beat their benchmark each year. Over periods of 10 years or more, 96% of them fail to. Those are awfully long odds.)
When times are good and the market - and your account – is up, it’s easy to forget about investment costs. But like termites in an antebellum mansion, the real damage is done over the long term. So stick with individual stocks, discount brokers, index funds and ETFs. Broker-sold products are virtually never worth the cost.
3. Stick to a Sell Discipline
Any investor can plunk for a few shares of stock. The real art of investing is knowing when to get the heck out.
You can’t do it with economic forecasting. There is no way to know with any certainty how the economy will do. And besides, there is no direct correlation between economic growth and stock market performance. The past six years have been a prime example of this. We’ve experienced the weakest economic recovery since WWII but one of the strongest bull markets of the last half century.
You can’t do it with market timing either. You may think some “system” or guru will warn you when to flee the market. Don’t count on it. When it comes to the short-term twists and turns in equities, there is no such thing as “the foreseeable future.”
With individual stocks, run a trailing stop behind each of your positions. This protects your profits in the good times and your principal in the bad ones.
In bull markets, investors often regret stopping out of a stock if it goes on to hit new highs. But, trust me, when the next bear market comes – and it will – you’ll be glad you stuck with a tried-and-true sell discipline.
In sum, follow these three basic rules and 2015 should be yet another profitable year.
Good investing,
Alex
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Source: Investment U