Create a financial plan. A financial plan helps you determine how much risk you need to take to potentially earn the types of returns to fund your goals over the desired time frame. Moreover, your financial plan should spell out the types of investments—stocks, bonds, cash—and the appropriate allocations needed to meet your goals, while remaining consistent with your risk tolerance.
Look at the whole picture. With dual-income couples and multiple job changes being the norm these days, it is very common to have investments spread over many accounts. These might include current 401(k) plans, 401(k)s at old employers, individual retirement accounts (IRAs), and brokerage accounts. It is critical to review your investments as a total portfolio across all of your accounts. Look at the overall allocation to determine if it is in sync with your financial plan.
Establish benchmarks. Just like you need a financial plan to help you decide where you are going with your investments, you need a benchmark to help you determine if you are on track. To evaluate the performance of your portfolio, establish a weighted, blended benchmark consistent with your target allocation. For example if your allocation is 50 percent stocks and 50 percent bonds, your benchmark might be weighted 50 percent to the Russell 3000 Index and 50 percent to the Barclays Aggregate Bond Index. You should also track your overall accumulation progress versus the various goals set forth in your financial plan. Lastly, you should track your individual holdings against the appropriate benchmarks.
Evaluate your individual holdings. Once you've determined that your overall allocation is in line and you've looked at how you are doing versus the overall benchmarks, it's time to look at your individual holdings. For mutual funds and ETFs, the comparison should be against market benchmarks and peer group measurements appropriate for the type of fund you are holding. For example, using the S&P 500 Index as a benchmark may be appropriate for a large-cap fund, but not for a small-cap or foreign stock fund. For individual stocks, look at an appropriate market index. If your stock holding has underperformed the index, perhaps you would be better off investing in a mutual fund or exchange-traded fund that tracks the associated index. Also, measure your stock's performance against your own goals and expectations for the stock
Get professional help. If you are uncomfortable monitoring your investments yourself, or just want a second set of objective eyes, hire a professional to help. Make your desires clear as to what type of help you need at the outset. Establish a set of expectations for the relationship at the outset so you are not disappointed with the service and advice you receive.
Investing is not an easy, hands-off endeavor. That is not to say that you need to trade frequently or look at your holdings every day. Instead, establish a routine, time frame, and process to review your holdings and measure your progress against your financial plan. That way you can make adjustments along the way as needed.
Roger Wohlner , CFP® is a fee-only financial adviser at Asset Strategy Consultants where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn.