Source: Flickr user: 401kcalculator.com.
Markets have gotten more volatile lately, and while that isn't uncommon for this time of year, you could be feeling a bit topsy-turvy about your portfolio. If so, then it could be the perfect time to evaluate your investments. Here are three ways to make sure your portfolio is in tip top shape.
No. 1: Write it in crayon
Famous former Fidelity mutual fund manager Peter Lynch once said, "Never invest in any idea you can't illustrate with a crayon."
That's not bad advice to follow, especially if you're trying to decide which stocks are worth keeping and which stocks are worth discarding.
If your portfolio owns stocks that you can't explain to a child with a crayon, then you might have gotten a bit out of your wheelhouse during the last market rally. If so, don't worry. Instead, break out the crayons and make some proactive decisions about what you really want to own for the long journey to retirement and beyond.
No. 2: Focus on diamonds, not rhinestones
Investing legend Warren Buffett once wrote in his letter to shareholders that "it's better to have a partial interest in the Hope diamond than to own all of a rhinestone."
The Oracle of Omaha's famous for his long-term thinking and penchant for owning great businesses at a fair price. If you're looking through your portfolio and find yourself wondering whether the businesses you own are Buffett-worthy, it might be time to make some changes, especially if your investments include more than a fair share of up-and-comers with sky-high valuations.
No. 3: Just stand there
Jack Bogle is the well-known founder of Vanguard and the pioneer of index investing, and with six decades of market experience he's survived plenty of market drops. This week, Bogle offered up advice to diversified investors on CNBC: "Don't do something. Just stand there."
If your portfolio is made up of index funds or index ETFs and those index funds and ETFs are appropriate for your age and risk tolerance, then it could be a mistake to toy around with your allocation or try to game the market.
In fact, rather than jumping out of your investments in hopes of jumping in later, it could pay off to create or to bump up a monthly investment program instead. Market dips are inevitable, and historically, long-term investors who stay the course and invest using dollar-cost averaging do better than people who trade in and out of stocks frequently.
Tying it together
If you approach the markets with a short-term focus, then you could find yourself owning overly complicated businesses at untenable prices. However, if you take a long view that focuses on investing in high-quality companies with reasonable valuations and low-cost diversified investment products, such as ETFs and mutual funds, then you'll probably be prepared for good and bad performance in the markets.
