Watching your investments: regular investment portfolio reviews lead to healthier returns. Investing wisely can reduce volatility in your portfolio

Quarterly reviews of stock and other investment performance are abundant these days. Business newspapers such as The New York Times and Wall Street Journal run quarterly rankings of performance. Business Week chips in with a look at the performance of individual stocks.

Presumably, many veterans read these articles and then compare their investment holdings with the various benchmarks.

There's nothing wrong with this approach to determining how your portfolio stacks up. But let's look at some other suggestions that should be part of an investor's regular portfolio maintenance. You should look at your portfolio much as you take care of your car--an oil change every 3,000 miles can only help maintain your car's performance.

The same goes for a quarterly investment checkup.

Assuming you have a system for tracking your portfolio, start by taking a look at performance for the most recent quarter. How did your stocks stack up compared to the Dow Jones Industrial Average or S&P 500? If you are heavily weighted in mid-cap stocks (stocks of medium size companies) traded on the Nasdaq, you should compare your portfolio's performance to the Nasdaq or Russell 2000 indexes.

Quarterly performance analysis is but one part of an overall assessment. Remember that a stock might languish in a particular quarter after two or three strong quarters in which it far outperformed the averages.

Then again, don't get overly excited when one of your holdings turned in a great quarter--you should take a longer look, especially if your goal is to build a long-term investment portfolio for you and your family.

So any good system for portfolio maintenance should include a number of different measures that track different time periods---one quarter, six months, one year, three years, and even five years or more, depending upon your goals.

You can and should work with your financial adviser and use all available tools in conducting your portfolio maintenance. Any number of Web sites provide--free of charge--stock charts that enable you to measure the performance of an individual stock with various averages over selected periods of time.

Tough Decisions

Next come some tougher decisions--when to sell, when to buy and when to hold.

Here again, consult your financial adviser. Research and analysis is critical before you make any decisions about buying or selling a particular holding.

See what the analysts are saying about the stocks (and take much of this with some grains of salt).

Then, take a look at how the company's competitors have performed. If you've found a stock's share price has under-performed compared to its competitors, you might be on to something. But you should try to determine why your "target" has performed poorly. Are the reasons correctable? Or do they reflect longer-term, structural issues that are unlikely to change at any time soon?

If you think the stock has a questionable future, then perhaps the time has come to divest it from your portfolio. If you think the problems are temporary, you'll want to wait before you make a final decision.

The key in all of this is knowing what you have in your portfolio, what you paid, how your holdings have performed, and how this performance stacks up against various averages. Your portfolio might be up 10% for the year, which sounds good, until you realize that your holdings as a group have under-performed the Dow or S&P 500.

Regular portfolio checkups, combined with regular maintenance, should enable you to avoid what happens when you don't take care of yourself--radical surgery. Remember, no matter how much anesthesia you get, surgery always hurts.

Asset Allocation

Most veterans are familiar with the expression "Don't put all your eggs in one basket."

Yet individuals who invested heavily in technology stocks in the last leg of the bull market did just that, as many lost substantial portions of their assets when the technology bubble burst and concentrated positions in the highly valued stocks declined significantly.

On the other end of the scale, retirees who place all of their money in conservative bonds miss out on the growth potential of stocks that can help protect their portfolios against inflation.

In order to avoid these types of undesirable outcomes, investors are wise to guard against such volatility by practicing the art of asset allocation, which simply means diversifying investments over a broad range of asset classes.

Through proper diversification, you can even out some of the market's ups and downs within your own portfolio. By combining the growth potential of stocks, the income of bonds and the liquidity of cash, you can structure your portfolio to improve your chances of achieving your financial goals.

For example, you might allocate 60% of your investment capital in stocks, 30% in bonds and the remaining 10% in cash. Each of these asset classes can be further diversified to include different types of investments, such as combining growth and value stocks, small-capitalization and large-capitalization stocks, and government and corporate bonds.

Asset allocation is a key factor in determining the success of your investment strategy. According to a widely recognized financial study by Brinson, Singer & Beebower published in the Financial Analyst's Journal in 1995, asset allocation can account for up to 93.6% of portfolio performance.

Stocks, bonds and cash tend to gain or lose value at different times and different rates--they don't move in sync. Setbacks in one category can be offset by gains in another. By carefully diversifying your assets, it can help reduce volatility in your portfolio. Proper asset allocation can produce current income while allowing for the potential of long-term growth. It can also provide the liquidity necessary to help meet short-term financial goals.

Proper Mix

To determine the proper mix of assets for your portfolio, you will need to understand the relationship between volatility and potential return, and how different asset classes perform over time. Generally, the higher the potential return, the higher the volatility of returns. Investments that have historically shown the greatest growth potential are also the most volatile.

On the other hand, if you want to minimize your exposure to volatility, you will usually have to sacrifice some level of return.

Developing the appropriate asset allocation depends on your age, your assets and your tolerance for volatility. Through a careful analysis, your financial adviser can help recommend an appropriate mix of asset classes designed especially for you.

VFW member ALEXANDER SMITH is a financial adviser and Persian Gulf War veteran, having served in the U.S. Navy as a P-3 "Orion" flight engineer with VP4. He currently lives in Whitefish Bay, Wis., and can be contacted via e-mail at [email protected].

For More Information

Bogosian, Wayne G., Dee Lee & Robert Clark. The Complete Idiot's Guide to 401(k) Plans. Alpha Communications, 2001.

Ellis, Charles D. & John J. Brennan. Winning the Loser's Game. McGraw-Hill Trade, 2002.

The Motley Fool.www.fool.com

Yahoo! Finance. http://finance. yahoo.com

COPYRIGHT 2003 Veterans of Foreign Wars of the United States
COPYRIGHT 2003 Gale Group