Episode 115: December 28, 2011
by Andrew Horowitz
How has another year gone by? Wasn't it just recently we were ringing in the New Year 2011? Oh, well. And more importantly, how well did your portfolio do this year? Were there things you wish you had done differently?
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There's always room for improvement, and one of the best times to review the performance of your investment portfolio is at the end of each calendar year, which allows you to make any changes you need to as you start a fresh year of investing.
Let's focus on 3 of the top questions you should ask yourself as you review what worked and what didn't in the year that was:
Question #1: "Am I still on track to meet my long-term financial goals?"
Of course, you have to have long-term financial goals to be able to answer this question, but in the end, this is the main reason you're doing all the work to manage your own portfolio and invest with winning strategies that beat the market over time. Maybe your goal is a stable retirement, paying for your child's college, taking care of your family, or saving up to buy your first house. Whatever your goal, put this year's performance in context of the bigger picture.
If for whatever reason, you feel like you're going off track or aren't making the stable percentage gains you expect to be making, now is the time to assess what's not working and take corrective action to get your portfolio back on a stable upward track that leads directly to a specific goal in the future.
Question #2: “If I'm not on track to meet my long-term goals, what specifically got me off course?”
It sometimes can be as simple as "I took too much risk and got hurt," with the solution thus being to cut back on risk. There are other investment "no-no's" which we've covered in prior episodes, and many of those stem from taking too much risk or following a hot tip or buying too much of a single stock or ETF. Remember, as investors, we need to strike a balance between too much risk and too little return. Maybe you held too much of your portfolio in ETFs like commodities, or put too much weight in a certain sector or certain stock. If you made an investment mistake, take corrective action and get back to a diversified portfolio. Learn what went wrong, if something did, and start to correct it accordingly. Don't beat yourself up over it though - we all make mistakes!
Question #3: "Was there something I should have done, but didn't?"
Some investors take on too little risk instead of taking too much, and while they probably won't see a big downswing in their growing portfolio, they might not be seeing the annual percentage returns they'd planned for. This is especially true for many investors after the fiasco that was 2008! Always remember, it's perfectly fine to take risk off for a period of time and focus more on portfolio protection -- you don't have to be invested at all times. However, if you have specific goals that depend on making a certain annual percentage return, if you don't put that money back to work in diversified investments beyond the safety of CDs, bonds, or even cash, you're also not going to meet your long-term goals by keeping your investment money too safe.
This doesn't just include conservative investors. Maybe you've always invested in stocks and bonds, and you saw how well some of the commodity markets did. Now might be the time to study up and see if you could further diversify a stock and bond portfolio with commodity or even currency ETFs to add some potential extra power to your portfolio.
The Next Steps
These three questions are big and require some deep thinking on both the performance of your investments, and your investment choices. It's so easy to keep going in the same direction and not change course when we need to, but as active investors, it's critical to know what we're doing right and what we're doing wrong. No, the goal is never perfection, and even the best portfolios experience down years, but that's all part of the process.
Take time to review your investment goals -- the reasons why you're investing -- to see if anything has changed in your life situation in the last year for better or worse, and if your portfolio goals and strategies need to be adjusted up or down accordingly.
If something went wrong, be honest with yourself and assess what went wrong. If you stayed the course bravely and didn't fall into the traps common to many new investors, be sure to reward yourself and promise to do the same good behaviors next year as well.
And even if nothing went wrong, there's always ways to improve your portfolio either by learning new knowledge and putting it to work, or exploring new investments that would fit within your growing portfolio. Many investors stick with stocks and bonds and that's perfectly fine, but sometimes you can benefit beyond looking at stocks and bonds. It doesn't have to be commodities - consider corporate or municipal bonds for example. Or how about adding a bond ETF instead of actual bonds?
We'll be discussing how to jump-start a new year, but for now, let's reflect on our own investment activities and choices in the last year and learn from our experiences so that we can make even better decisions in the year ahead!
And of course consider picking up a copy of my latest book The Winning Investor's Guide to Making Money in Any Market at Amazon and other fine booksellers. And in print and digital versions too!
Want to become a Winning Investor? Then be sure to get your copy today: The Winning Investor's Guide to Making Money in Any Market.