Every now and then a prospective client – more often than not a business owner – comes into my office with a problem. While his operating business is performing well, his portfolio is broken.
There?s an old saying: if you ever find yourself in a hole, the first thing you do is stop digging. The same goes with your portfolio. If after looking at your investments, you realize that it?s just not performing the way you want it to, don?t just accept it. Take action.
So how do you fix a broken portfolio? Here are some tips and hints to get you started:
Think risk first
The stock market is no place to go gambling. This is particularly true for business owners, who already take on enough risk simply by owning and operating a business. If your portfolio?s performance has been subpar, take a long, hard look at your holdings, and try to determine whether you have too many investments that fall into the high-risk, high-return category. If so, it might be a good idea to close some of them out. Instead of accepting risk blindly, your goal should be to be picky about the kind of risk you take on. Ideally, you want to take on calculated risk – that is, risk that can be quantified, managed, balanced and (if necessary) hedged. This one simple step can solve a lot of portfolio problems before they begin.
Don?t be afraid to take losses
When it comes to investing, everyone makes mistakes: ideas that don?t pan out; prospects that fail to live up to their potential; missed details that change the long-term opportunity. But once you realize you?ve made a mistake, you can?t ignore it. You need to fix it. I see this all too often: an investor would rather wait indefinitely for losing positions to regain lost ground than accept the loss and move on. Sure, sometimes losers come back. But you could be waiting a long time – just ask all those people who put their money into the Nasdaq at the height of the dot-com boom. Usually, it?s better to sell, claim a capital loss and move capital to a more profitable opportunity.
Diversify, diversify, diversify
You know the three rules of successful real estate investing? The same principle applies to portfolio management – but instead of location, it?s diversification that counts. I?ve noticed that this can sometimes be an issue with business owners, many of whom have become comfortable with keeping the bulk of their wealth in a single operating business. When it comes to building an investment portfolio, they follow the same strategy, loading up on a single stock or market sector that they know exceptionally well. Sometimes this approach leads to big gains. More often than not, it leads to big problems.
Monitor and revise your portfolio regularly
A portfolio isn?t something you just throw together and then forget about. It requires constant monitoring and revision to ensure it remains in step with your personal financial priorities and with broader economic and market trends. Get into the habit of reviewing your portfolio regularly (every quarter, for example), and evaluate your big-picture financial plan at least once a year. That way, you can prevent small problems from becoming big problems.
Work with a professional
Portfolio management is not a do-it-yourself project. It requires a different skill set than managing a business. To do it right, you need to work with someone who has a proven track record of building successful portfolios for high-net-worth clients and has steered those portfolios through good times and bad. ?
