Your investment portfolio and your closet have more in common than you think. They both represent your personal taste, for better or worse. They’re full of purchases you justified as “investments.” They both cost you time and money to build. And both require regular maintenance unless you want to hold on to something that hasn’t paid off since 1979.
Over the years, you buy an item here and an outfit there, slowly building your wardrobe, until one day you step back and realize it’s less a carefully culled collection and more a haphazard assortment of randomly acquired pieces. And it doesn’t work nearly as well together as you thought it would when you took a chance on those tie-dye leggings.
The same thing can happen to your investment portfolio, says Scott Thoma, principal and retirement strategist at Edward Jones in St Louis. “If you’re like many, you buy a fund here, a stock there. You have your employer-sponsored plan, maybe an IRA on the side,” and a non-retirement account or two. The result may be a hodgepodge collection of investments with no rhyme or reason behind them.
Every spring, your closet gets an overhaul, so why not your investment portfolio? This year, take spring-cleaning digital and clear out all the dead wood in your investing accounts.
[Read: How to Structure Your Portfolio for 2018.]
Start with each investment’s role. As with your closet, the first step to spring-cleaning your portfolio is to evaluate what you own and why you own it, says Rich Ramassini, senior vice president at PNC Investments. Ask yourself: What role does it play in my portfolio? How is it helping me achieve my goals?
Every investment in your portfolio should have a purpose. Maybe it’s a large growth fund for capital appreciation. Or maybe it’s a short-term bond fund to help you meet your daily expenses. Whatever it is, “make sure you don’t have too much doing the same job,” Thoma says. Your portfolio won’t appreciate any faster if you have 10 large growth funds instead of one.
Diversification isn’t about the number of investments but rather how each one complements the others. Like a good movie, your portfolio should have heroes and villains. “If you’re properly diversified, you’re always going to be mad about something, and that’s OK,” Thoma says. “You want to make sure [your] investments are performing differently because that’s what they’re designed to do.”
For instance, if the economy is doing well and consumer spending is up, you’d expect your retail investments to outperform. But if one of your retail holdings is underperforming instead, the problem could be something specific to that particular investment or company. On the other hand, if the economy is lagging, you’d expect your retail investments to be down, which is why you hold defensive sectors like consumer staples to balance them out. “The future is uncertain,” Thoma says. That’s why we want each portfolio investment to play a different role, and when it can’t fill the part, it’s time to look for a better alternative.
Those roles should be assigned based on your long-term goal for your investments and how you expect each holding can help get you there. If one of your holdings doesn’t serve a purpose, clean it out. Then make sure any future investments fit their role before you buy them.
Rebalance back to your benchmark. While you review your portfolio’s cast of characters, make sure you own “the right amount of each of those assets and, if not, rebalance,” Ramassini says. When you rebalance, “you’re evaluating how the assets have performed and making sure the allocation is consistent with your goals, risk tolerance and time horizon.”
[Read: When Should You Rebalance Your Portfolio?]
Bull markets can lull people into a sense of complacency. It’s easy to think everything is copacetic when the market is doing nothing but going up, but what goes up can just as easily go down. “It’s great to have that run-up, but it’s important to rebalance so you can take some of the winnings off the table and go back to your benchmark,” says Bill Tait, a financial advisor at Essex Financial in Essex, Connecticut. By realigning your portfolio to safer allocations, you’ll be better prepared for the inevitable downturn.
Watch out for home country bias. As you rebalance, keep an eye out for home country bias, Tait says. Home country bias is the tendency for investors to prefer investments in their own country. This can lead to owning too many domestic companies and missing out on lucrative opportunities abroad.
“The international market is a very important spot right now,” Tait says. “And if you look at the price-earnings ratios, you’ll find the international developed markets are more fairly priced than the domestic markets.” At the beginning of March, the MSCI World ex USA index ( ACWX), which represents all developed market countries except the U.S., had a P/E ratio of less than 17 while the Standard & Poor’s 500 index was more than 25.
Don’t forget your 401(k). It’s easy to overlook your 401(k) when reviewing your investments, but it should be “managed in a similar fashion to your overall portfolio,” Tait says.
All your accounts work together to help you reach your financial goals, so you should evaluate them as a whole. How does your 401(k) fit into the broader picture of your other investments, both retirement and non-retirement? What role do your retirement funds play in your overall portfolio?
This is also a good time to check if you’re on track with your retirement contributions. The last day to contribute for the previous year is the current year’s tax filing deadline, and putting a little more aside costs less than you think, Tait says.
[Read: The 7 Best Tax-Advantaged Accounts for Retirement Savings.]
Depositing $100 into a pre-tax retirement account doesn’t take $100 out of your budget, he says. If you’re in the 30 percent tax bracket, for example, and earn $100, what you actually receive after taxes is about $70. So contributing $100 pre-tax to your retirement actually costs you only $70. It’s a $10 for $7 deal on your future and worth every penny.
More from U.S. News
10 Tips for Handling Investments and Divorce
9 Investing Myths That People Still Believe
7 Things That Can Derail Your Retirement Investing
4 Steps to Spring-Clean Your Portfolio originally appeared on usnews.com
