Tips for realigning
If your mutual fund portfolio hasn’t been performing as well as you think it should and you’re not sure why, it might be time for a bit of spring cleaning.
A cluttered investment lineup is inefficient at best and costly at worst; by identifying overlapping holdings and gaps in your asset allocation plan, you may be able to cut your expenses and boost your total return. If your mutual fund garage needs a clean sweep, here’s a checklist of 10 things to consider:
1. What’s your goal, and are you on track to reach it? Everybody’s got dreams, but we don’t always articulate them when we’re investing, which financial planners say is a big mistake. Identify your goals – saving for retirement, a college education or your dream home – figure out how long it will take and how much you’ll need to achieve them and set up individual accounts for each.
2. Is your portfolio diversified? You may hold a lot of funds, but that doesn’t mean all your eggs aren’t in one basket. Planners say people often pile into the types of funds that have worked well for them in the past, or whatever they think will bring the highest return, and wind up short in other areas, like fixed income, which can provide important protection in down markets. A better strategy is to own a bit of everything.
3. Is your asset allocation out of whack? Once you’ve figured out the appropriate asset allocation for your goals, make sure it stays in balance. Check on how 2005’s performance affected your holdings; if you are 5 percent to 10 percent outside your targets for each asset class, make adjustments.
4. Have you been tax-smart about what you hold where? Key to an organized portfolio is making sure your assets are tucked away in the right buckets. This is determined by the capital growth and income profile of the asset. For example, you wouldn’t want to hold bonds in a taxable account because they throw off income. On the other hand, a fund that invests in growth stocks would be fine for a taxable account, because it will generate little to no income.
5. Is your level of risk appropriate? If you’ve had or expect a change in your circumstances or goals, such as the birth of a child, a marriage or divorce, a new business venture or a pending retirement, the asset allocation choices you made several years ago may no longer be valid.
6. Is it time to reassess any of your funds? If you own a mutual fund that has raised expenses, changed managers, shifted its strategy, been merged into another fund or been acquired by another company, it may be time to say so long.
7. Does your portfolio have sufficient inflation protection? If you’re not careful, inflation will quietly erode your wealth over time. Vehicles such as Treasury Inflation Protected Securities, or TIPS, real estate investment trusts, or REITs, growth stocks and even your home can act as a hedge.