-- Make Sure You're Well Diversified -- Both Across and Within Asset Classes. Now take a look at the investments you own in each asset class. Do you have enough variety? Holding a variety of investments -- diversification -- is an important factor in controlling risk. In fact, how you diversify can be even more important than the individual investments you choose.
It stands to reason that you don't want your portfolio's health to be dependent on the performance of any one investment. For instance, if you own only one stock and it falls 20 percent, the value of your investments is down 20 percent. Add in even one more stock that rises when the other one falls, and you'll be in better shape.
Do you need to diversify more? Here are a couple of general ways to do it:
-- Diversify across asset classes. Invest in large well-established companies, smaller emerging companies and international stocks, as well as in bonds and cash.
-- Diversify within asset classes -- Invest in a variety of market sectors (i.e. technology, health care, energy), companies and countries.
In addition to investing in a number of individual stocks and bonds, consider investment vehicles such as mutual funds and exchange-traded funds (ETFs) as a possible way to help you create a diversified portfolio.
-- Consider Taxes. Where you hold certain types of investments -- whether in a taxable or tax-advantaged account -- can have an impact on the capital gains taxes you pay. In the long term taxes can represent a significant drag on your overall investment returns.
To lessen this tax bite, first make full use of tax-advantaged accounts such as a 401(k) or an IRA. Then, as you choose investments:
-- Place relatively tax-efficient investments in taxable accounts (e.g., stocks you plan to hold more than a year or municipal bonds).
-- Place relatively tax-inefficient investments in tax-advantaged accounts (e.g., stocks you plan to hold less than a year).
-- Monitor and Rebalance Your Portfolio To Stay on Track. Creating an investment plan is a great start. But now you have to stay on top of it to make sure it's still working for you. Resolve to check your portfolio at least once a year -- quarterly is even better. You won't always like what you see, but with knowledge and planning, you may be able to make it better.
Here's what to look for:
-- Relative Performance -- Evaluate your portfolio's performance using the right benchmarks. For example, if you've invested in U.S. large-cap stocks, measure the performance of your stocks against the S&P 500(r) Index. For small-cap U.S. stocks, you can use the Russell 2000(r) Index. International stocks can be measured against the MSCI EAFE(r) Index. Even if you feel your stocks haven't performed as well as you hoped, if they are matching or outperforming their index, they're probably still a good choice.
-- Investment concentration. Make sure you don't have too much invested in a particular sector, industry or company. For instance, no more than 10 percent of your stock investments in any one company (and preferably much less) is a good guideline.
-- Individual investments -- Check to see if the ratings on your stocks have gone down.
-- Put Your Portfolio In Perspective. Once you've reviewed your portfolio and refined your investment plan, put the performance of your investments in perspective. We all want better investment results, but investing is a means to an end, not an end in itself. Stay focused on your goals. Be disciplined and follow your plan no matter what the market is doing. And remember that long-term progress is ultimately more important than short-term performance.