But this summer, the stock market is volatile. Bond investors wonder when interest rates will rise, cutting into returns. A debt default still is possible in Greece. It could happen in the U.S., too, if Congress and President Barack Obama fail to raise the government’s debt ceiling.
Despite all the uncertainty, there’s no excuse for inaction.
Periodically tweaking the mix of stocks, bonds and any alternative assets, such as gold, is essential to avoid taking on too much risk or becoming too conservative. Also take a close look at investments in recently hot segments of the market. Top performers may make up a bigger piece of your portfolio than you’re comfortable with.
Here are seven portfolio checkup tips, including special considerations for the current market environment:
1. Create a plan
Determine your appropriate asset mix. For example, an investor expecting to retire in 2025 might set a target of about 70 percent in stocks and 30 percent in bonds. If you’re retired, you’ll want to reduce risk and emphasize bonds. If you’re younger, be bolder and emphasize stocks.
2. See where you stand
To assess your asset mix, examine all of your investments — 401(k)s,
individual retirement accounts and any individual stocks. Don’t overlook accounts with former employers. See how far you may have strayed from your target asset allocation percentages. Rebalance if you’re 5 percentage points or more above or below your targets.
3. Dive deep to diversify
A more thorough review can pay off. Examine your investments within each asset category, with an eye toward diversification.
One tool to uncover trouble spots is Morningstar’s Instant X-Ray, on Morningstar’s website under the ‘tools’ tab. It breaks down total investments by asset category and highlights market segments where an investor may be over- or underexposed. It can also show whether multiple mutual funds count the same company’s stock among their top holdings.
4. Consider doing nothing
If a portfolio checkup doesn’t reveal any big variations from your savings goals, it may not make sense to make any adjustments.
5. Limit interest rate risk
Bond investors face substantial long-term risk from an inevitable rise in short-term interest rates, currently near zero. When the Federal Reserve raises rates, prices for bonds with locked-in rates will drop. When rates rise, investment returns will decline at bond mutual funds, which continually buy new bonds to replace those that have matured. Bonds with maturity dates of 15 years or longer are more vulnerable to rising rates.
6. Consider what’s hot, not
Stocks of small companies have performed unusually well in recent years. Funds that specialize in small-cap stocks have returned an average of more than 9 percent a year over the latest 3-year-period, versus less than 4 percent for large-cap funds. That’s why small-cap stocks deserve special scrutiny to ensure they don’t make up a disproportionate share of your portfolio.
Market segments that have been hot this year and deserve special attention include health-care stocks and real estate investment trusts. Stocks of big banks have fared poorly, financial services funds have lost an average 3 percent — which could present a buying opportunity.
7. Stay flexible:
Maintaining cash investments such as money-market funds can provide cushion from a stock market decline. Cliff Caplan, a financial planner and president of Neponset Valley Financial Partners in Norwood, Mass., is considering increasing holdings in gold. He’s not alone. Investors bid gold prices up to an all-time high of $1,589 an ounce — not adjusted for inflation — partly because of fears over the U.S. debt ceiling debate
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