Managing your stock investments doesn’t have to be a daily pain. Rebalance once a year for stress free investing
Making money on your investments can be intoxicating. You’ll notice that your portfolio value increased by several thousand dollars on one strong day and you’ll be hooked.
This is where investing gets dangerous.
Too many investors actively watch the TV shows, websites and all the other places for stock market analysis and start thinking they can ‘beat’ the market. What started out as a plan to beat your own financial goals and a moderate 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, a secret to stress free investing that will meet your goals. The secret is that unless you’re working in investments and providing advice on a daily basis, 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 bad quarter of sales?
Resist the temptation to jump login to your investing account because it really doesn’t matter.
First, any news you are hearing will be almost instantly reflected in the stock price. There are countless traders, brokers and hedge fund managers sitting by their screens all day and are instantly trading on the news. Rushing in to buy or sell shares just 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 that 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 amount 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 were only planning on holding 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 investing 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 about correcting these imbalances If the imbalance isn’t too great, 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 in 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. Through Motif, you can buy 30 stocks for one commission and instantly lower your risk compared to buying individual stocks. By investing in the 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 all the way but there may be rare occasions when you should sell a stock in your portfolio. The reasons are probably fewer than you think and really come down to whether the stock fits with your overall portfolio strategy.
- Has the company become much riskier because of new technology or new competitors?
- Has management decided not to support the dividend or other cash return to shareholders?
- Has management made unethical decisions with which you are not comfortable supporting as a shareholder?
- Have the shares done so incredibly well that they are too large a portion of your portfolio?
Only in extreme cases would I make the decision to sell a stock outside of my quarterly or annual review. Since prices immediately reflect any new information, there’s nothing to be gained by rushing to your computer to sell.
Unless you are constantly putting money into the same stock, you shouldn’t have to worry about it becoming too big a portion of your total investment. Only if a stock surges and is more than 5% or 6% of your total portfolio should you think about selling some off.
The simplicity in this stress free investing strategy is going to be in contrast to the vast majority of ‘advice’ you’ll see on TV or the internet. Take it from someone that has worked in the markets for more than 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.