Spring Clean Your Portfolio: A Step-by-Step Guide

Spring is here, and it's time to declutter not just your closet but also your investment portfolio. Just as you would go through your wardrobe to remove items that no longer fit or suit your style, it's essential to review your investments to ensure they align with your current financial goals and risk tolerance. Here’s a comprehensive guide to help you give your portfolio a much-needed spring cleaning.

Why Spring Clean Your Portfolio?

Spring cleaning your portfolio means checking your investments and making necessary adjustments to ensure they match your financial goals and risk tolerance. This process helps simplify your portfolio, diversify better, and potentially grow your money’s potential. By re-evaluating your investments, you can:

1. Simplify Your Portfolio: Reduce the number of investments, making it easier to manage and balance.
2. Reach Your Goals: Sell investments that no longer meet your goals and find new opportunities that better align with your objectives.
3. Stay Up-to-Date with the Market: Make smart choices and grab opportunities as they come, keeping your portfolio current with market trends and your needs.

Step-by-Step Guide to Spring Cleaning Your Portfolio

# 1. Reassess Your Goals

The first step is to take another look at your long-term goals for investing. Have these changed from when you first started buying stocks and shares? If they have, it might be time to make a new investment strategy that will improve your chances of reaching them. If your goals haven’t changed, evaluate whether your current portfolio has a chance of reaching them. It is normal for the performance of investments to fluctuate, and assets that once matched your goals might not do so anymore.

# 2. Determine Your Current Risk Appetite

Your risk appetite refers to the level of risk you are willing to take on in your investment portfolio. It determines the amount of volatility and uncertainty you are comfortable with when it comes to your investments. High-risk investments often come with higher potential returns but equally high potential losses. On the other hand, low-risk investments may not offer the highest returns but are often more stable and require less ongoing management. Determine your current risk appetite and adjust your portfolio accordingly.

# 3. Rebalance Your Portfolio

Rebalancing is an essential component of the portfolio management process. It involves making adjustments to your portfolio when your preferred asset allocation has shifted. This process ensures that your portfolio remains aligned with your risk profile and financial goals. For example, if you have a portfolio of 70% stocks and 30% bonds and it drifts to 76% stocks and 24% bonds, rebalancing would involve adjusting the portfolio back to the 70/30 mix to stay on track with your risk and return objectives.

There are several methods to rebalance your portfolio:

- Calendar-Based Rebalancing: Designates a frequency for resetting the portfolio back to the target asset allocation. You can use this method to conduct a review on a quarterly or yearly basis.
- Threshold-Based Rebalancing: Triggered when a portfolio experiences a change in its asset allocation that exceeds a certain threshold. This method requires regular monitoring and may not be practical for DIY investors.
- Calendar- and Threshold-Based Rebalancing: Combines both rebalancing approaches. Based on a calendar frequency, your portfolio is rebalanced if its assets have strayed by more than a specific percentage from the target allocation.

# 4. Sell Stretched-Out Items

Sometimes, despite your best efforts, investments can stretch beyond their intended bounds. Holding onto winners can lead to overconcentration, which can push the risk level of your portfolio higher than intended. Think about paring back your winners so you can reinvest in your less stretched-out investments. Sell enough of your outsized investments to bring them back in line with your intended allocation and use the proceeds to buy more of the underperforming investments to bring them back up to the size you intended them to be.

# 5. Reconsider the Underachievers

Not all underachievers need to be kept. Sometimes investments that were bought with the best of intentions never achieve what you were hoping they would. Consider if you could instead invest in something that better serves your overall goal. Don’t fall victim to the loss aversion bias, where the pain of loss is so strong that investors refuse to accept defeat.

Tax Considerations

When it's time to rebalance your portfolio, consider these tax-efficient best practices to potentially improve your investment performance without sacrificing your risk/return profile:

- Be Mindful of Costs: To minimize transaction costs and taxes, you could opt to partially rebalance your portfolio to its target asset allocation. Focusing primarily on shares with a higher cost basis (in taxable accounts) or on asset classes that are extremely overweighted or underweighted will limit both taxes and transaction costs associated with rebalancing.

Extra Tip: Keep It on Track

Just like when you clean your house, you want to keep it in shipshape going forward. That’s the goal of having an investment policy statement and a retirement policy statement. These documents articulate how you will be selecting your holdings and also how you’ll be monitoring them on an ongoing basis. You can find links to both of those documents, templates for both of those things, in the transcript that accompanies this video.

Conclusion

Spring cleaning your portfolio is an essential task that ensures your investments align with your current goals and risk tolerance. By following these steps, you can simplify your portfolio, reach your financial goals, and stay up-to-date with the market. Remember, investing is a long-term game, so don’t make impulsive decisions based on short-term market fluctuations. Give your investments the time they need to grow and reach their full potential.