If you have a ritual to turn your house upside down for a thorough spring cleaning every year, you may want to do the same for your portfolio. If a lot of dust has settled on your investments over the years, it may be time to size things up and evaluate your holdings. Below are five tactics to help you see – and optimize — your portfolio in the new light of spring.
1. Sweep your house into order
When was the last time you assessed your portfolio allocations and rebalanced its exposures?
Let’s start from the top and assess whether your asset allocation still makes sense. If you want to maintain your original allocation but it is drifting, you can rebalance it by redistributing the weightings among each asset class. While rebalancing does take work, the alternative is a portfolio with out-of-balance allocations that could very well change the portfolio’s overall risk level and performance.
Rebalancing the motifs in your account takes only a few mouse clicks. The motifs created by the Motif investing and research team are periodically reviewed to ensure they maintain their original investing themes and ideas. Our next major rebalance is scheduled for June. You will be automatically alerted about rebalance updates. For more, check out The importance of rebalancing a portfolio over time.
2. Is it time to dust off old strategies and look forward?
Does your portfolio need a fresh start?
While you’re sizing up your portfolio, it could also be a good time take stock of the macro environment and see whether your investment thesis still make sense. In the current climate where a strong U.S. dollar is putting the brakes on inflation and consumers are pocketing greater purchasing power, you may want to consider plays that take advantage of the appreciating greenback and shed exposure to foreign currencies. After all, of the major central banks, only the Fed has signaled rate hikes this year; in Europe, central bankers are still keeping rates around zero while Bank of Japan has kept rates below zero. So, consider strategies like investing in shares of companies that rake in their earnings from the U.S. domestic market or trim your holdings in foreign bonds. To get some ideas going, check out the All-American motif.
3. Time to part with low performing funds and high cost?
Spring cleaning is about letting go – like that old sweater you’ve clung to but have not gotten any wear out of it for a decade.
Have your investment returns met your expectations? For instance, if your mutual funds have underperformed, you may want to consider replacing them with ETFs.
ETFs track an index, specific asset or basket of assets and can cover sectors, commodities, currencies, bonds, and other asset classes.
On the performance front, the latest research from S&P Dow Jones Indices, Does Past Performance Matter, shows that relatively few active managed funds can outperform year after year. Of the 678 U.S. equity funds that made the top quartile as of September 2013, only 4 percent managed to stay in the top quartile after two years. ETFs also tend to be more transparent. While mutual funds are only required to disclose their holdings every quarter, you can usually verify your ETF’s daily positions.
On the cost front, ETFs tend to have lower cost because as passive investments that track indices, they do not require high-priced investment professionals to look after them; the passive nature of these vehicles also means fewer trades which translates to lower commissions.
For cost, performance and transparency, reasons, it is no wonder that last year ETFs drew a record $2.2 trillion, according to data from Fund Distribution Intelligence and Investment Company Institute.
If your mutual funds have underperformed and command high management fees, keep in mind that ETFs are a popular alternative.
4. Pruning your holdings
Think about harvesting your gains and cutting your losses.
Take a look at the winners and losers in your portfolio. If you have accumulated a few winners over the years and believe their themes have played out, or if the company is fully valued, consider cashing them in and realizing your long term gains. After all, we have had a strong bull run of the last seven years and taking profits would be a wise move as the climate is now more uncertain. By selling your positions now, you get to reinvest your gains while delaying the payment your taxes for 12 months. You are also taxed at the long term capital gains of 15 percent, which is significantly lower than the rate at which short term gains are taxed (this would be your normal income tax rate).
If, on the other hand, you have accumulated some losers and no longer believe in them, ditching them now may be as good a time as any. Your losses can also reduce your capital gains and soften the tax blow.
5. De-cluttering and streamlining your portfolio
Do you have multiple retirement accounts? Do you have duplicate holdings in your brokerage accounts?
If you are someone who has hopped from one workplace to another, you may have built a nice collection of 401k and IRA accounts. If that is the case, you may want to consolidate them because you can probably better manage your retirement accounts and track your assets when your funds are not all spread out among different accounts. Having fewer accounts will help you better size up your net worth, assets and liabilities.
So, there you have it. We encourage you to pick one of these spring cleaning tips and get to work. A word of warning: once you dig in, it may be hard to stop because the act of spring cleaning and getting into your portfolio’s nooks and crannies does something to induce satisfaction and put a spring in your step. Happy cleaning!
Motif does not provide tax advice. This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, investors should consult with a qualified tax advisor, CPA, Financial Planner, or Investment Manager.
Investing in securities involves risks, you should be aware of prior to making an investment decision, including the possible loss of principal. An investment in individual stocks, or a collection of stocks focused on a particular theme or idea, such as a motif, may be subject to increased risk of price fluctuation over more diversified holdings due to adverse developments which can affect a particular industry or sector. Investments in ETFs can include those with a narrow or targeted investment strategy and can be subject to similar sector risks than more broadly diversified investments. Motif makes no representation regarding the suitability of a particular investment or investment strategy. You are responsible for all investment decisions you make including understanding the risks involved with your investment strategy.