Does this sound familiar? The stock market has been going up significantly since the beginning of the year but your portfolio is down. That is one clear warning sign that it is time to do some work on your portfolio before things get even worse.
There are a number of additional warnings signs that an investor should look for when analysing their portfolio. Each one of these warnings signs signal that it is time to do something. In other words, you need to take action and you need to do it immediately.[ad#tdg-embedded]
Warning Sign #1: Not keeping up with the market
This is the most important warning sign. If your portfolio returns are not as good, or better, and the overall market (i.e. S&P 500), then you are doing it wrong! It is too easy to simply buy an index fund to receive the return of the market so there is no excuse not to get at least that level of return.
If you are under performing the market then make changes immediately and ensure you at least get that minimum level of returns.
Warning Sign #2: All your assets are moving in the same direction
In a perfect world, your portfolio will have some assets that go up and some that go down – all at the same time. If all assets in your portfolio are heading down in the same time then those assets are too correlated. Granted, in times of extreme market action (think 2008/09) then everything can go down at the same time. However, most of the time there should be assets that are going up even when others are going down.
Assets to look at that can be uncorrelated with equities include precious metals and bonds.
Warning Sign #3: One or two of your assets are a large chunk of your net worth
If only one or two of the assets in your portfolio make up a significant portion of your portfolio value then you are not diversified enough. Your next step needs to be either to sell some of that asset and buy some other assets or put more money into your account and spread it out to other assets.
It is important to note that it is alright to have one index fund make up a large portion of your portfolio. Index funds are inherently diversified. What I am getting at here is if one or two stocks are the majority of your portfolio.
Warning Sign #4: The volatility in your portfolio is forcing you into emotional decisions
If watching your portfolio move up and down is leading you into making decisions that are rash and not based on sound decision making logic, then I would suggest you are holding the wrong stocks, bonds, or other assets. Your investor profile is not correct and you should spend some time determining exactly what type of investor you are and then buy assets that fit within that framework.
To determine your investor profile, go to IFA.com and take the Risk Capacity Survey.
Warning Sign #5: Your are paying a high amount in fees
From time to time it is important to look at the assets you hold and confirm what the fees are for holding onto those assets. If you have dividend growth stocks, then check your brokerage account to ensure you are paying low commissions.
If you have index funds, index ETFs, or mutual funds, check the MERs and ensure they are low, low, low. For mutual funds in particular, watch for higher than average MERs especially if the fund is not meeting the market returns. If it isn’t sell it and buy something better (but be cautious of taxes if it is in a taxable account).
Warning Sign #6: You do not have an investment code or philosophy
This is a back to basics kind of warning, but every investor needs to have a code or philosophy that guides their decisions. Take a look at The Dividend Guy Code for an example.
Warning Sign #7: You don’t remember why you own a particular asset
If you are looking at your portfolio and there is an asset in there that just does not seem to fit or worse, you do not seem to remember why you own it then that spells trouble. Everything in your portfolio should have a specific purpose.
For example, I hold small-cap value stocks in my portfolio to provide additional returns with some additional risk.
Warning signs from your portfolio can come out of nowhere. It is important to review your portfolio with your eyes on the above signs to ensure that you are protected as much as possible. Investing is a balance between risk and reward, and watching for these warnings signs will go a long way to help managing the risk piece.