Upgrade Your Portfolio in 2009

It’s no secret that 2008 was rough on most investors. And 2009 didn’t get off to a particularly good start, either. Yet there’s still plenty of time left this year to upgrade your investment portfolio in a way that can help you stay on track toward your long-term goals.

But what exactly does it mean to “upgrade” your portfolio? Do you have to systematically go through your investments and eliminate all those that performed poorly last year? Or should you just sell of any investments that you think are risky?

Neither one of these ideas are good solutions. In the first place, a severe bear market such as we’ve experienced tends to drag everything down, even quality investments. Furthermore, you can’t get rid of all investments that carry some risk — because all investments carry some risk.

So, instead of taking either of these two drastic approaches, consider the following moves:

• Review your portfolio objectives. Your investment objectives are based in large part on your risk tolerance and your stage of life. If these factors have changed, you may need to rebalance your portfolio. In fact, it’s a good idea to rebalance your holdings at least once a year, no matter what’s going on in the markets or in your life.
• Increase your portfolio’s quality. Right now, you can find many quality investments that are very attractively priced. In past market recoveries, these types of investments usually have recovered faster than lower-quality ones. And because the biggest gains usually occur early in market rallies, you don’t want to wait too long to explore these opportunities.
• Don’t overload on a single investment. In general, it’s not a good idea to have a single stock take up more than five percent of your portfolio. In recent months, many investors have learned the hard way about the dangers of holding too much stock in a single company — even one that once appeared to be a “blue chip” firm. And the same principle applies to your employer’s stock — if it’s offered as an option in your 401(k), don’t go overboard on it.
• Own a sufficient number of stocks. How many stocks should own to diversify the equity portion of your portfolio? There’s no one right answer for everyone, but to really attain proper diversification, you may need to own at least 20 or 25 stocks, spread out among all the major industry sectors. Of course, diversification, by itself, cannot guarantee a profit or protect against a loss, but it can give you more chances for success while helping reduce the effects of volatility on your portfolio.
• Invest in a range of fixed-income securities. Just as you need to own a reasonable amount of stocks, you should also own a number of fixed-income vehicles — perhaps 10 to 20, depending on your situation. You can diversify these holdings by purchasing different types of bonds — corporate, municipal and Treasury — and certificates of deposit. To further diversify, buy fixed-income vehicles with varying maturities.

You can’t control the economy or the financial markets. But by following the proven techniques described above, you can help control your own financial destiny. Take action soon.