Broken Investment Strategy? Here's How to Fix It
Jun 21st 2013 9:01AM
Updated Jun 21st 2013 9:04AM
If you want to reach your financial goals, you need an investment strategy you can rely on to get you through tough times while making the most of the long-term growth opportunities in the financial markets. Too often, though, people get stuck with an investment strategy that doesn't work the way they want it to, yet they don't know what to do to fix it.
Fortunately, addressing problems with the strategies you use to select stocks, bonds, and other investments doesn't have to be complicated. Here are a few ideas on what to do if you face some common problems with your investing.
Problem 1: Your returns are falling short of the market.
One of the most common complaints comes from investors who find that their portfolio returns don't match up to the overall market. There's nothing more frustrating than seeing stock markets rise to record highs day in and day out, only to see your own investments lag behind.
There are two ways you can address this issue. One is simply to recognize that with many investments, expecting perfect correlation with market returns is unreasonable. For instance, many niche investment products deal with completely different markets than those that the most popular benchmarks track, and so the entire reason for choosing those products is to avoid perfectly matching the broader market.
But if you want to match the market, tailor your investment strategy to use market-tracking ETFs. For instance, the SPDR Dow Jones Industrials ETF , colloquially known as the Diamonds, tracks the popular Dow average. The popular Spiders, officially called the SPDR S&P 500 ETF , moves nearly in lockstep with the S&P 500. You won't get exactly the performance of the indexes, as ETFs have fees involved that will detract somewhat from total returns. But with ETF fees being relatively low, the amount you lose to those costs is much less than you'd pay with an actively managed mutual fund.
Problem 2: Your portfolio seems too risky.
After a pullback like we've seen over the past couple of days, it's common to discover that your portfolio seems to have more risk than you thought. While making a knee-jerk emotional response to steep losses is never a good idea, sometimes the only way to get a true read on the risk level in your investment strategy is to go through an actual correction.
Often, all it takes to get your risk level back to where it belongs is to rebalance your portfolio. With huge gains in stocks in recent years, many investors have seen the percentage of stock investments in their overall portfolio rise dramatically. Bringing your stock allocation down to more appropriate levels will reduce risk, with the caveat that the usually more sedate bond market has actually exhibited greater risk lately.
Problem 3: You've got too many stocks.
When you run into a promising stock, there's a great temptation simply to buy it. But as a result, many investors end up owning dozens of stocks added on impulse buys but never critically assessed to see if they deserve to remain in their portfolio. That can make it impossible to track what's happening with every company.
One solution is to pick your best one or two ideas in each industry. As an example, if you think that natural gas is poised to keep rebounding, then low-cost producer Ultra Petroleum is arguably the most likely to produce the greatest profits from the space. Similarly, with gold-mining stocks, Yamana Gold emerges with the most attractive combination of low costs, growth potential, and balance-sheet strength.
On the other hand, if you truly can't figure out which company in a given industry is most likely to succeed, then sector-specific ETFs are very useful in giving you broader exposure without unduly cluttering up your portfolio. Again using natural gas as an example, United States Natural Gas focuses on prices of nat-gas futures rather than concentrating on any one producer, and with the nat-gas futures markets exhibiting minimal amounts of contango currently, the ETF isn't subject to the same downward pressure that has plagued its longer-term results over the years.
You can fix it!
Having a broken investment strategy is no fun for anyone. But if you keep these simple fixes in mind, you should be able to make your investing experience a lot more rewarding, both financially and in providing peace of mind.
The article Broken Investment Strategy? Here's How to Fix It originally appeared on Fool.com.Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Ultra Petroleum. The Motley Fool owns shares of Ultra Petroleum and has the following options: Long Jan 2014 $30 Calls on Ultra Petroleum, Long Jan 2014 $40 Calls on Ultra Petroleum, and Long Jan 2014 $50 Calls on Ultra Petroleum. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.