In the first part of this article, we looked at the allocation of your portfolio, reviewed when to rebalance, and made sure that you weren't sending the tax man any more money than necessary. Now we'll move on to Steps 2 and 3, looking at your holdings and reviewing them in the context of your overall retirement investment goals.
Step 2: Review your funds
If your holdings are limited to index funds, there's probably not much you need to do beyond rebalancing. But if you hold actively managed funds, take a few minutes to run down this checklist for each fund:
- Has the portfolio manager changed recently? Different managers have different styles, and a fund's volatility and performance may be very different under new leadership even if its investment objective hasn't changed. A manager change isn't necessarily a red flag, but think of it as a yellow one: something to keep an eye on.
- Check for "style drift." Go to the fund company's website and call up its page on the fund, or head over to Morningstar's website. Look for the "style box," which looks like a little Rubik's Cube. That will tell you where the fund currently falls on the growth vs. value and small-cap vs. large-cap spectrums. Make sure it's where you think it ought to be -- if you bought a fund thinking it would fill the large-cap value niche in your portfolio, but it's more of a mid-cap growth fund these days (this sort of drift is more common than you'd think), consider finding another fund.
- Review the fund's performance. Don't just look at the fund's total returns -- although that's definitely the place to start. Download the fund's most recent annual report. Inside will be a short interview with the fund's manager, called something like "Management Discussion & Analysis" (it's legally required). If recent performance has been stinky -- or unusually good -- it's worth finding out why. That interview should help you find the answer. It probably goes without saying, but a fund with an extended record of stinky performance should be sold. (This isn't like stock investing, where you buy on the dips.)
- Check the turnover rate. As fellow Fool Amanda Kish pointed out recently, a fund's turnover rate gives you several important clues about the manager's approach. It's also an important consideration if you hold the fund in a taxable account -- too much turnover can leave shareholders with a nasty tax liability.
Admittedly, if you're looking at funds in your 401(k), the above considerations may not matter too much -- even if your fund is stinking the place up, you may not have access to a suitable alternative. If that's the case, consider switching to an index fund -- most plans have at least one or two -- or just buy the best funds you can and complete your asset allocation strategy by using your IRA holdings to fill in the gaps.
Step 3: Take stock of your stocks
If you hold stocks in your retirement accounts, chances are you're already a hands-on investor. But even if you follow your stocks regularly, running down this checklist can help ensure that your holdings are a smart fit for your overall retirement portfolio.
- Is the investment thesis intact? Is your original reason for buying the stock still a good one? For instance, if you bought a stock in the hopes that it would double, should you hang onto it after it does? Likewise, if a stock's price hasn't met expectations, should you keep hoping for a move or dump your shares now?
- Does the stock still fit into your portfolio? Hot small-cap growth stocks have a way of turning into more stable mid-caps over time. If you have a few of those, are you still OK with owning those companies? Or do you really want to replace those former growth bunnies with new, more promising choices?
- How are market conditions and business developments likely to treat the stock in the coming months? Nobody can really predict the future, and market timing isn't a great strategy as a general rule, but sometimes upcoming changes are obvious. Stocks that are sensitive to the economy, such as Toyota (NYSE: TM ) , may be approaching a cyclical downturn. A recent management shakeup may have changed things, for better or worse. Consider these kinds of developments as you decide whether to add, hold, or move on.
That's it! That wasn't so hard, was it? Stick a note into your calendar to do this again in a year or so, and sleep soundly tonight -- your portfolio's health is in good hands.
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