Managing your portfolio in today's market
May 6, 1998 - © Copyright 1998 Sheldon M. Bell
I have been an investment professional for almost two decades. It still amazes me to see the blunders that investors continue to make in managing or having someone else manage their investment portfolio.
The biggest mistake investors make is to focus on the market .The market to them represents the value of the Dow Jones Industrials Average (DJIA). The DJIA which represents the value of the 30 stocks that make up the index may have little correlation to their portfolio. The boldest of the DJIA watchers attempt to time the market to no avail, as they usually are in the market when they should be out and vice versa. The problem with trying to time the market is that the market gains usually happen in relatively few of the trading days, so market timers have the deck stacked against them.
Another big mistake investors make is they lack diversity in their portfolio . They may own too few stocks or too few mutual funds. They may own a large number of stocks in the same industry or many mutual funds that have the same assets or investment styles.
The key to successful portfolio management is just that, manage your portfolio. What I mean by this is to set up the right mix of stocks bonds and cash for your specific financial situation. There is no cookie cutter portfolio that is best for all investors.
In determining the right mix of assets for your portfolio you need to take into consideration your proclivity for short term market risk, your cash flow needs, prevailing interest rates, your income tax situation, your experience as an investor, your estate planning needs and many other factors.
If you depend on your investment portfolio to generate current cash flow to live on and are risk adverse, then make sure that you have a larger percentage of cash equivalents in your portfolio and limit the percentage that you have invested in common stocks. Instead, invest a larger percentage in convertible bonds and preferred stocks.
As your allocation percentages change make sure you re-balance periodically to bring each asset class back to your desired weighting. That is what portfolio management is all about.