You know that face pets and small children make when they taste something yucky? That’s the same face investors have been making since early January, when the stock market started to go sour.
Don’t let that bitter taste spoil the rest of your year — or your long-term investment returns. Remember, investing success is measured in decades, not months or minutes. The best thing you can do while the stock market waxes and wanes is take a timeout to tune up your portfolio and prepare it for the long road trip ahead. Take about a half-hour to perform this six-step investment checkup.
1. Put performance in perspective
Don’t spend your energy sulking about recent lackluster returns. Your time is better spent comparing the performance of each investment against its peers or an appropriate benchmark index. For example, a large-cap stock mutual fund would seek to mimic or outperform the returns of the S&P 500 Index; the MSCI index would be the benchmark for a global markets mutual fund.
Any investments that have been lagging their benchmark (or the performance of companies in the same business) for more than five years should go on your list for further research, which leads to the second step of your portfolio review.
2. Ferret out excess fees
One of the biggest threats to your long-term returns is fees, such as those charged by actively managed funds. Every extra fraction of a percentage point you pay in management fees dings you twice — first, there’s an immediate effect on your returns; next, there’s a sacrifice of compound growth those dollars could have earned over time.
It’d be one thing if funds that charged more consistently delivered better returns. But that’s not the case. Research by mutual fund tracker Morningstar on expense ratios (aka management costs) and overall returns found that the returns of low-cost funds beat higher-cost ones in every time period and in every asset class. This is why cost-conscious savers prefer investing in index mutual funds and exchange-traded funds.
Also scan for administrative, investment and individual fees in 401(k), 403(b) and 457 plans, as well as account expenses in individual retirement accounts and online brokerage accounts. All of those can further handicap your returns.
Put your investment accounts under a microscope at Feex.com (a free fee analysis site) to identify any parasite fees before they wreak more havoc on your returns.
3. Size up your stocks
Ideally, before any stock purchase, investors would follow what fund management guru Peter Lynch called a “two-minute drill,” which he outlined in his book “One Up on Wall Street.” The drill is an elevator-pitch-length rundown that covers why you bought shares of a company (the opportunity), what needs to happen for the company to succeed (the fundamental success metrics) and any potential pitfalls that would prevent your investing thesis from playing out.
If you don’t already have an index card on hand for each of your stock positions, make one now so it’s ready for your next portfolio checkup.
4. Cover your asset classes
Variety is both the spice of life and a key ingredient for investors who want to avoid market-induced indigestion.
A properly diversified portfolio that contains a range of assets (cash, bonds, stocks) with different characteristics (e.g. small- and large-company stocks, foreign and domestic equities, growth vs. income investing objectives) will help keep portfolio volatility at a minimum.
For an easy-to-follow asset allocation recipe, check out the investment mixes and portion sizes in target-date mutual funds offered by companies such as Vanguard and Fidelity. Target-date funds take into account an investor’s time horizon (such as anticipated retirement year) and devise an appropriate mix of assets to achieve the goal.
» MORE: How to invest your 401(k)
5. Adjust your portfolio’s alignment
As the market’s returns expand and contract over time, so too will the size of the investments you so carefully measured out to bake a perfect asset allocation pie. This will require making periodic adjustments in order to realign — or rebalance, in investing parlance — your portfolio.
Rebalancing involves selling portions of any investments that have outgrown their allocation target and using the proceeds to shore up positions in categories that have become underweighted. If you have a 401(k) tool through your employer, rebalancing is often just a matter of a few clicks. But don’t overdo it. Unless an investing category strays more than 5% from the target allocation, adjusting once a year is plenty.
Many 401(k) providers allow plan participants to set up a schedule (annually or quarterly, for example) for automatic rebalancing. If yours does, take advantage. The best robo-advisors also offer automatic rebalancing as part of their portfolio management services.
» MORE: The best robo-advisors
6. Make peace with your losers
This last step might be painful, but it’s time to muster up the courage to face the stinkers in your portfolio.
Selling loser investments you hold in a taxable account can be the ticket to a tax break when you file your 2016 return. A maneuver called tax-loss harvesting lets you use the loss on investments you sell to offset (aka lower, or even eliminate) up to $3,000 of the taxes you’ll owe on investment gains or even ordinary income.
Here, a bit of self-control is warranted: Time, specifically a long-term investing time horizon, heals many wounds. Although 2016 may have not been kind to stocks so far, thoughtfully chosen, solid companies eventually recover and continue to grow.
Spend the last few minutes of your portfolio checkup taking deep, calming breaths and repeating this mantra uber-investor Warren Buffett learned from his mentor, economist Benjamin Graham: “Price is what you pay; value is what you get.”
This article was written by NerdWallet and was originally published by USA Today.
Image via iStock.