The start of a year is a good time to review and rebalance your investment portfolio. What should you look at? Every stock that you own. Are they all companies that you would buy now, if you didn’t already own them? If you’re going to make a switch, now is the time to do so.
Don’t be afraid to cut your losses. One of the great errors investors make is holding on to stocks that haven’t performed well, waiting to “get even.” By this reasoning, a loss isn’t really a loss until it’s realized. You won’t have to admit to your spouse or your friends that you picked a lemon.
This is how investors turn small losses into disasters. Often, there’s a reason that stocks fall in price, and that reason may lead to even steeper losses. If you’re no longer enthusiastic about a stock, sell it, even if it means recognizing a loss.
The same is true of your mutual fund holdings: Take a hard look at each fund and bail out, if you think another fund is better suited to your needs.
Sell the stocks in your portfolio that seem to be overvalued or the companies that no longer offer unique products and services. As you rebalance, look for asset classes that have lagged in recent years and bring your allocation back in line. If you desire a portfolio that includes 15 percent invested in small-company stocks, but your present allocation is down to 10 percent, it’s time to channel money into this asset class.
Rebalancing a portfolio isn’t easy because it means moving from winners to losers. Nevertheless, if you review your portfolio carefully you’ll probably find some winners that look overvalued; then you can go looking for some undervalued securities to round out your holdings.
