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Green seedling growing from the pile of coins
If you are currently in the process of reviewing you investments strategy for the year, here are four important steps to get you started.
1. Determine how your portfolio is currently divided among stocks, bonds, cash, and alternative investments
The importance of proper asset allocation when designing a portfolio cannot be overemphasized. The way you allocate your portfolio has a direct link to its risk and return. Some financial assets are riskier than others, although they will usually offer better returns. Regardless of your risk appetite, make sure you have a well-balanced portfolio. Large mutual companies usually have software that can tell you the best way to mix your investment assets in order to have a proper handle on the all-important risk-return trade off.
2. Establish if more than 5% of your investment portfolio is apportioned to a single stock position
You should never allocate too big a portion of your portfolio to a single stock, it can really magnify your risk exposure while offering little potential benefit. It does not matter if you know the stock personally because you work for the company. People who have invested heavily in a single stock based on one bias or another have often lost substantial portions of their portfolios when the market or the company they invested in experiences a free-fall in share prices. So, no matter how much you know about a particular stock, do not break this simple, but proven, 5% rule.
3. Determine how your funds cost in terms of expenses each year
Expenses associated with the management of your portfolio can do serious damage to your annual portfolio return. So, if more than 1% of your portfolio goes to expenses, it is time to find cheaper alternatives. For instance, you can invest in market-tracking index funds, which offer rock-bottom costs and unparalleled tax efficiency, two factors that will help reduce the cost of your funds and improve your portfolio return.
4. Analyze how your current stock investments did during the 2008 and the 2013 crisis
You have to be psychologically prepared for a financial crisis. Seeing how your stocks performed during severe market declines such as those witnessed in 2008 and 2013 will help you adjust your portfolio accordingly. If you are ill-prepared for such a scenario, you may get emotional and end up selling during a steep market decline, ending up with significant losses.
Conclusion
As you seek to better your investment skills in 2015, above are some of the issues you should take into consideration. To sum up, you should balance your portfolio properly, ensure no single stock takes up more than 5% of the entire portfolio value, reduce the costs of managing the portfolio, and determine how prepared you are for an economic crisis.
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