When you’re working with a personal financial counselor, one of the first things he or she should help you do is decide what to do with your current investments. Do your homework so that you can buy and hold solid investments for the long haul, but note that there are times when selling is appropriate. In fact, if you’ve been holding investments that seem to be doing poorly over an extended period of time, closely examine the situation. Try to determine why they haven’t done well.
If a given investment is down because similar ones are also in decline, then the long-term perspective still holds, and perhaps so should you. However, if something is inherently wrong with the investment in question, such as high fees or poor management, take the loss, and make doing so more palatable by remembering two things. First, if it’s a non-retirement account investment, losses help reduce your income taxes. Second, consider the opportunity cost of continuing to keep your money in a lousy investment: What kind of future return could that money provide if you instead switched into a better investment?
A useful way to evaluate your portfolio once a year or every few years is to imagine that everything that you currently own has been sold. Ask yourself whether you’d choose to go out today and buy the same investments. This question is especially good to ask yourself if you own lots of stock in the company you work for. Are your reasons for holding your investments still valid?
When assessing your current holdings, be careful that you don’t dump a particular investment just because it’s in what will turn out to be a temporary slump. Even the best investment managers have periods as long as a year or two during which they underperform. (Sometimes this happens when the manager’s style of investing is out of favor for the time being.) But remember, the better definition of temporary is one to two years, not months or days.
Just as you get attached to people, places, and things, some investors’ judgment may be clouded due to attachment to an investment. Even if an investor decides to sell an investment based on a sound and practical assessment, his emotional attachment to it can derail the process, causing him to refuse to part with it at the current fair market value. Attachment can be especially problematic and paralyzing with inherited assets. Inertia is also a problem for some people. Some investors have accumulated tens or hundreds of thousands of dollars in checking accounts!
Last but not least, remember to keep bigger-picture issues in mind. Some investors have excess cash in a low-interest money market fund or savings account while they carry high-cost debt like auto loans and credit-card balances. All it takes to convince them to change is to show them just how much they can save or make by paying down the high-cost debt. Likewise, investors who prefer individual stocks may fret when one of their holdings falls, and they won’t examine their overall portfolio’s performance. Too frequently, such investors dump a stock currently in the hole because they dwell on that stock’s large decline and overlook how little impact this one holding has on their overall portfolio.
When purchasing new investments, many people fail to consider their overall asset allocation. Typically, they read an article somewhere or get a tip from a colleague and then wind up buying a recommended investment. Along with not having done sufficient homework, investing in this fashion often leads to a hodgepodge of a portfolio that isn’t properly diversified. Failure to make an overall plan usually leads to a plan for failure, not success.
Wanting to be loyal team players, other folks fail to consider the big picture and over-invest in employer stock. This strategy is particularly dangerous because a company’s falling on hard times can lead not only to the loss of a job but also to the loss of retirement assets when the stock takes a permanent nosedive. Investing more than 10 percent of your financial assets in your employer’s stock may be too risky.
Eric Tyson is a nationally recognized personal finance counselor, writer, and lecturer. He has been featured on and quoted in hundreds of local and national outlets, including Newsweek, The Wall Street Journal, Los Angeles Times, Chicago Tribune, Forbes, Kiplinger’s Finance Magazine, Money, and Bottom Line/Personal. He has appeared on NBC’s Today Show, ABC, CNBC, PBS Nightly Business Report, and CNN, and has been heard on CBS national radio, NPR Sound Money, Bloomberg Business Radio, and Business Radio Network.