It’s Not About What You Buy But How You Allocate

Do you have a few winning stocks that you’re excited about and check them daily? Do they collectively make up a meaningful part of your portfolio? Maybe not.

There’s not a shortage of investors offering up investment ideas and happy to talk about their favorite stock picks. But has the performance of these winners had a meaningful impact on the performance of your portfolio? You know where I’m going with this.

It’s a new year and a great time to give your portfolio a tuneup. Aside from your prideful winners, get the rest of your portfolio in a position to celebrate too. Here are some simple guidelines that will ensure that your money will be running on all cylinders:

1. Don’t be a stock jockey. Congratulations on buying Nvidia or riding the Mag 7 wave, but don’t get too far over your skis. They might only be a small allocation overall, and when you factor in the stinky stocks in your pile, it might not be worth the celebration. When you add up all of your individual stock picks, what’s the net-net?

2. Diversification keeps you in the game. Have you gradually transitioned into more US large-cap stocks, funds, or ETFs? Are you positioned to participate if small-cap, international, emerging market stocks come back to life? It will happen at some point while tech-like stocks take a breather. Now is the right time to balance your allocation.

3. Make time work for you. I’m always telling my kids that they have something I don’t. Time. If you’re under fifty, you could make a strong case that little to none should be in bonds. Sure, rates are close to twenty-year highs, but chances are they’ll be lower in the next few years.  By planning to live longer than you think, you’ll enjoy better collective returns.

4. Stick with ETFs. They’re inexpensive, tax-efficient, diversified, and provide choices for every asset class. Not as sexy as picking individual stocks, but you’ll get paid for being less sexy.

5. Explore new asset classes in ETF form. Commodities, crypto, real estate, buy-write, private stocks and credit are all accessible and bring something different than traditional stocks and bonds. Have fun learning about how these work and introduce them into your portfolio. Just keep the allocations appropriate.

6. Keep it simple. Aside from your current 401(k) account, consolidate all other investment accounts at one online brokerage platform. Keep allocations to a reasonable number. Easier to track. Easier to allocate. Easier to do tax reporting.

7. Rebalance annually. This will ensure your participation in the next new trend and make it meaningful to your portfolio while banking a portion of this past year’s winners.

8. Don’t worry. Don’t get caught up in the big up days and the big down days. They all even out. Keeping your emotions in check ensures you’re there for the long run. The worst thing you can do is chicken out, sell a meaningful part of your portfolio, and leave it sitting in cash when the market rebounds. Nobody has the intestinal fortitude to make this work consistently.

9. (Optional) If it helps, carve out 10% of your portfolio to play around with stocks. Some people enjoy being in a more active role with their portfolio, but give yourself an honest assessment at the end of the year.

Most seasoned money managers underperform the S&P 500. Why even try when you can provide some simple discipline and let time and compounding work for you.

I offer all this up honestly as I’ve made all the mistakes.

• Sold out of stocks and ETFs because I thought at the time the market was going to go down just to look back decades later on what it could have been.

• Bought beat-up stocks thinking they’d rebound and watched them eventually go under.

• Kept high cash balances and became disinterested in my portfolio when the economy and markets were challenged.

• Held on to losers much longer than I should have because I didn’t want to admit that I was wrong about the stock or the fund manager.

• Pretended I had some type of knowledge or opinion on the future direction of the markets.

The post It’s Not About What You Buy But How You Allocate appeared first on Tom Lydon.