MANAGE YOUR INVESTMENTS LIKE THE “PROS”
How to Have a Successfully Self-Managed Portfolio
by Laury Adams
Managing one’s investments offers challenges and opportunities. Far too often, we become head-in-the-sand investors treating our investments like an unattended garden hoping to some day discover amazing growth with no effort on our part. Or we act like a “nervous Nelly” managers constantly buying and selling in hopes of reaping quick profits. We need to have patience and a steady approach to achieve our goals in the money game. Vigilance is necessary to prevent unexpected “detours.”
- First, we must commit to devoting some time and effort to managing our investments. Who in the world cares more about our money than we do? Who will live with the results? Sometimes we put a relationship with a stockbroker or money manager above taking care of ourselves. We are #1! And we are the CEOs of the most important business in our lives—our personal finances!
- Next, we must have a way to regularly review our investments. If we hire someone else to manage our holdings, we must make sure they have carried out our requests. I’ve done initial financial reviews for clients who thought they had conservative portfolios, but their brokerage statements revealed they were one hundred percent in equities (stocks). Surprise! Surprise!
- It is important to determine how much risk we can tolerate. A moderate portfolio is often positioned with 40% in fixed income investments and 60% in equities. The level of risk may change from time to time. It can be determined by factors such as personality, needs, age, or how one feels about economic conditions. If the stock market is at an all time high, we may want to limit our risk. Certainly, we know that jumping off an eight foot ladder poses far more danger than jumping off a four foot ladder.
The level of risk can be determined by our objective—GROWTH or PROTECTION? As we age, the later is usually more important.
We can best determine our level of risk by staying aware of market “realities.” We were confronted with a new reality between March 24, 2000 when the S&P 500 stood at 1527 and Oct 9, 2002 when it sank to 777. This stock index declined 47 percent, the greatest loss in our lifetime! Steep market declines make some people so fearful they are afraid to take any risk at all. But others quickly forget such a decline, take no caution, and plunge into investments.
Although diversification in a portfolio may be one way of spreading risk, it is often mistaken for limiting risk. Diversification does not always reveal the amount of risk in a portfolio. For that reason, I developed the concept of “Asset Risk Allocation,” a unique way to analyze risk in one’s portfolio. The percentage of total holdings in non-retirement and retirement accounts is calculated in each of the following five categories: Conservative; Conservative Growth; Moderate Growth; Growth; Aggressive Growth. This makes it possible for each investor to customize a portfolio based on their tolerance for risk and desire for protection.
- Individuals can benefit from using the professional strategy called “rebalancing.” Good money managers do this. But when we manage our own investments we are sometimes reluctant to implement this strategy. This means the investments in a portfolio are periodically repositioned to maintain a level of risk determined by the objective of the investor. This can range from conservative to aggressive growth and is achieved by specifying appropriate percentages to be invested in fixed income and equities.
Most individual investors are not inclined to rebalance their portfolios. No one likes to get off the back of a winning horse or walk away from the gambling table when experiencing a winning streak. Likewise, when we are raking in profits, we are reluctant to sell winners in order to reduce the risk in our total portfolio. What’s more, we often rationalize keeping these winners by saying we don’t want to pay tax on the profits that would be incurred on a sale.
But if we have losses, we are tempted keep these investments hoping the losses will eventually turn into profits. Of course, the best course of action is to reposition our holdings by selling the least desirable investments.
- Consider top-performing no-load mutual funds for investments in your Self-Managed Portfolio.
Advantages:
- You can directly buy and sell many mutual funds with no transaction fee through large investment companies such as Fidelity, Vanguard, and T. Rowe Price.
- You can choose no-load funds with the best investment managers.
- Performance records are available each day in business publications and on the Internet.
- Mutual funds provide diversification.
- They require low minimum initial investments—usually $2500-$3000.
- Regular automatic investments (dollar-cost-averaging) and reinvestment of distributions can be requested.
- Long-term capital gains and dividends from the funds have a tax advantage of 15% maximum.
Strategies for Self-Managed Portfolios
- Identify goals
What do you want your money to do for you?
What are you willing to do with your money?
- Determine Asset Risk Allocation
- What risk are you willing to take?
- What are realistic returns? Time frame under various economic conditions.
- Choose Investments to fit your Asset Risk Allocation model
- Do you regularly monitor and evaluate your holdings?
Check percent in each category:
- Is your total portfolio within your “comfort zone?”
Can you sit through a time of crisis with no panic?
Check your positions in each category:
- Are your holdings appropriate for your risk allocation model?
- Should you rebalance your holdings to stay within your risk level?
- Use Investing strategies to minimize risk
- Dollar-Cost-Averaging (automatic regular investments)
So you want to be an investor? GET REAL! |
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Are you ready for the ride? |
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Rank |
Date Started |
Ended |
Days |
% of Loss |
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6 |
6/17/1901 |
11/9/1903 |
875 |
46.1% |
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3 |
1/19/1906 |
11/15/1907 |
665 |
-48.5% |
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9 |
11/21/1916 |
12/19/1917 |
393 |
-40.1% |
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5 |
11/31/1919 |
8/24/1921 |
660 |
-46.6% |
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4 |
9/3/1929 |
11/13/1929 |
71 |
-47.9% |
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1 |
4/17/1930 |
7/8/1932 |
813 |
-86.0% |
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2 |
3/10/1937 |
3/31/1938 |
386 |
-49.1% |
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8 |
9/12/1939 |
4/28/1942 |
95 |
-40.4% |
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7 |
1/11/1973 |
12/6/1974 |
577 |
-45.1% |
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10 |
1/15/2000 |
10/9/2002 |
999 |
-37.8% |
Note: The 37.8% was the decline on the Dow.
The S&P 500 declined 47%!