Managing your stock investments doesn't have to be a daily pain. Rebalance once a year for stress-free investing
We've covered reasons to start investing and creating a step-by-step investing strategy, but how do you maintain your investment portfolio once you have set it up?
Making money on your investments can be intoxicating. You'll notice your portfolio value increase by several thousand dollars on one good day, and you'll be hooked.
This is where investing gets dangerous.
Too many investors actively watch TV shows, websites, and all the other places for stock market analysis and start thinking they can ‘beat' the market. What began as a plan to beat your financial goals and get a reasonable return becomes a game to get the highest return possible.
And that is how people lose money in stocks and never reach their financial goals.
There's a secret that the investing industry doesn't want you to know, and it is the key to stress-free investing that will meet your goals. The secret is that unless you're working in investments and providing advice daily, you don't need to check your investments more than monthly – no quarterly – wait, annually!
But what if you hear a particularly juicy tip about a stock? What if one of the stocks you own just posted a lousy quarter of sales?
Please resist the temptation to log in to your investing account because it doesn't matter.
First, any news you hear will be instantly reflected in the stock price. Countless traders, brokers, and hedge fund managers are sitting by their screens all day and immediately trading on the news. Rushing in to buy or sell shares means you are late to the game.
Second, there is always information floating around the markets. Stocks will be too expensive to some and a screaming buy to others. Constantly listening to this market noise will have you buying and selling all the time. The only people who profit are those collecting the trading fees.
Stress-Free Investing and Stock Rebalancing
Think of your investment account more like a savings account. Put money in every month. At the end of every three or six months, use the money you've accumulated to buy more shares of the stocks you own or to buy other companies. This will decrease the number of times you buy stocks and the fees you pay.
Every year, check the value of your stocks and the value of your total investment by sector and asset class. Have stocks soared higher, taking their value to 50% of your portfolio when you only planned to hold 30% of your wealth in stocks? Has one company's stock jumped or fallen significantly?
Remember, your target investing percentages across stocks and bonds are important because it establishes how much investment risk you have in your wealth. If you set up your investment strategy to be extremely safe with 80% bonds, then letting stocks become 50% of your portfolio after several strong years could put you at risk of a market meltdown.
Your annual check-up isn't about timing the market but correcting these imbalances. If the imbalance isn't too significant, say you've got 35% in stocks instead of your 30% target, then save your money and don't worry about it.
This kind of stress-free investing serves two purposes:
- You never move too far away from your target percentages in assets or sectors. This helps to keep your risk where you want it.
- You are more likely to be selling the investments that have gone up and may be relatively expensive. You're taking your profits and giving your losers a chance to rebound.
One of my favorite new ways to invest is through Motif Investing and its innovative way to buy stocks online. You can buy 30 stocks for one commission through Motif and instantly lower your risk than buying individual stocks. By investing in a group of stocks, you smooth out the ups and downs and avoid panic selling your investments.
This also helps to reduce your costs when you go to rebalance every year because you can buy or sell the entire group of stocks on one commission. Check out my Motif Investing review, including some great options to diversify your investment.
Stress-Free Investing and When to Sell your Stocks
I'm a buy-and-hold investor, but there may be rare occasions when you should sell a stock in your portfolio. The reasons are probably fewer than you think, and whether the stock fits your overall portfolio strategy.
- Has the company become much riskier because of new technology or new competitors?
- Has management decided not to support shareholders' dividends or other cash returns?
- Has management made unethical decisions you are uncomfortable supporting as a shareholder?
- Have the shares done so incredibly well that they are too large a portion of your portfolio?
I would only decide to sell stock outside my quarterly or annual review in extreme cases. Since prices immediately reflect any new information, there's nothing to be gained by rushing to your computer to sell.
Unless you constantly put money into the same stock, you shouldn't worry about it becoming too significant a portion of your total investment. Only if a stock surges and is more than 5% or 6% of your entire portfolio should you think about selling some off.
The simplicity of this stress-free investing strategy will contrast with the vast majority of ‘advice' you'll see on TV or the internet. Take it from someone who has worked in the markets for over a decade. Nobody ‘really' knows where stocks are going, and the only people making money off the complicated strategies and advice are those collecting the fees or selling their analysis.
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.