Portfolios and investments need to be monitored from time to time, specially if you plan to buy fractional shares. Too many people set up a portfolio and then ignore it for too long. This video explains how to manage a portfolio over time. If you have set up your plan properly managing a portfolio is easier than you think.
More resources to download
- MANAGING THE PORTFOLIO TRANSCRIPT (PDF) (329 downloads)
- Investment Portfolio Review Check-up (420 downloads)
- Annual Financial Check up Workbook (428 downloads)
- Portfolio Manager Spreadsheet (302 downloads)
Slide 1: Hi! It’s Jim again. This video is the third and final video of a three part series on investing. In this video, I want to show you how to manage your investment portfolio once it’s set up. The process is easier than you might think.
Slide 2: Managing a portfolio is only easy if your take the time to set up a plan for your portfolio in the first place. There are three basic steps to creating a plan for your portfolio:
– STEP 1 – Make the plan personal by understanding your personal needs, risk tolerance, time horizon and other financial objectives
– STEP 2 – Develop and Asset Mix using the science of modern portfolio theory and efficient asset allocation
– STEP 3 – Pick the appropriate investments that fit into the mix using good research.
Once you have your investment plan, the next step is to monitor it and manage it. You can’t just set up a plan and leave it and never look at it again. There are 4 ways to manage your portfolio
SLIDE 3: The first strategy to manage your portfolio is probably the most common one – THE WING IT STRATEGY. There really is not strategy or if there is, it’s not consistent and it changes as often as the seasons change.
The second strategy is trying to TIME THE MARKETS. Personally, I think this is the worst strategy because it is impossible to be able to predict the future with any degree of accuracy or consistency. Some people make calls on the future and are sometimes right but generally this is luck
The third strategy is to most common strategy preached by the investment industry – BUY AND HOLD. As much as I get and understand BUY AND HOLD, remember that buy and hold ignores one of the key components of making money. To truly make money you have to BUY LOW SELL HIGH. Buy and hold ignores the sell side of the equation and for that reason may not be perfect.
The last strategy is the best strategy – REBALANCING forces BUY LOW SELL HIGH into practice and thus is a great way to manage the portfolio.
Let’s take a look at an example of rebalancing:
SLIDE 4: Let’s say you have a $100,000 portfolio that has 5 investments.
- First you have 10% invested in some apples
- Then you have 15% invested in oranges
- Another 40% is invested in Strawberries
- You’ve got 20% in pineapple and
- 15% in grapes
Let’s say after 1 year, the portfolio grows to $105,000. That’s a 5% return. If the portfolio is diversified properly not all the investments will grow at a 5% rate. Instead, you can see that some investments will grow faster, some will grow slower and some might lose money.
The apples and oranges have been your best investments while the pineapples have been your worst investment. What does you gut tell you to do?
If you think about it, most people would keep the winners and sell the losers. Who would ever want losers in a portfolio? The problem with this strategy is you are employing BUY HIGH, SELL LOW which is the opposite of what you are supposed to do.
Instead, rebalancing suggests you should simply rebalance the portfolio to the original mix of 10% apples, 15% oranges, 40% strawberries, 20% pineapple and 15% grapes. In doing so, you would take the profits from the apples and oranges to buy more pineapple. BUY, LOW SELL HIGH.
If you think about it, it’s so simple but just not easy to do because psychology is so powerful. If you are a do-it-yourself investor, you do not have to get more sophisticated than rebalancing the portfolio once per year. In doing so, you will employ a strategy to manage your portfolio and practice the one key to making money – BUY LOW SELL HIGH!
SLIDE 5: I hope you can see that, Although there are many ways to manage a portfolio, the simple and prudent approach is to rebalance your portfolio.
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