Along with your New Year's resolution to eat healthier or go to the gym more often, take some time to examine your investment portfolio. Use the holiday break to get your investments in order, whether your goal is retirement, college, a new home, or a combination of those. Here are eight investing resolutions for 2011:
Make a plan. Investors can be mislead by following the herd mentality, says Peter Greenberger, manager of mutual fund research at Raymond James. If your friend rushes to buy safer investments like treasuries and short-term bond funds because of volatility in the stock market, you don't have to follow. "If you're looking to make a down payment on a house in three months, maybe that makes sense, but if you're 30 and your investment horizon is retirement … you have 25 to 30 years to recover," he says. Be aware of your time horizon and risk tolerance, and create a plan based on those ideas, he says.
Rebalance. It's important to rebalance your portfolio periodically because your allocations can change over time based on the market's returns. No matter how often you rebalance—whether it's once a year or once a quarter—Greenberger says it's important to make sure your allocations stay in line with your original goals. For example, if you have 60 percent of your portfolio in stocks and 40 percent allocated to bonds, your allocations can shift if the stock market rallies substantially and your fixed-income investments fall in value. "If you want to make sure that you're sticking to your plan, you're going to need to reallocate," Greenberger says.
Invest on a regular schedule. It's a good idea to invest on a consistent basis rather than try to time the market. An easy way to do this is through dollar-cost averaging, in which you invest a set amount at a regular interval, regardless of how the markets are performing. Sometimes you'll buy shares near their peak, but you'll also invest during market dips, when your dollars go farther. "When [stocks] go up, you're happy because the value of your existing shares is going up," says Adam Bold, founder of the Mutual Fund Store, an investment firm with more than $5 billion in assets. "When [stocks] go down, you're happy because you have an opportunity to buy more shares at lower prices."
Don't pay too much. Research has found that the cheapest funds outperformed the highest-cost funds in every asset class over time. But keep in mind that some asset classes are pricier than others. Large-cap funds are generally cheaper than small-cap or international funds, for example. Christine Benz, Morningstar's director of personal finance, offers a guide. Generally, she says, investors should stick to funds with fees that fall in the lowest quartile of their category. She recommends not paying more than 0.85 percent for an for domestic large-cap stock funds, 1.03 percent for small-cap funds, 1 percent for international stock funds, and 0.60 for intermediate-term bond funds.
Don't trade too much. Watching your funds plummet while others skyrocket can be hard, and you may be tempted to sell right away. But before making any dramatic changes in your portfolio, consider that trading costs can take a big bite out of your long-term returns. The best plan is to choose an allocation strategy and stick with it, Greenberger says. "It's not about how much you make, it's about how much you keep," he says. "At the end of the day, the focus is what can an investor earn on an after-tax, after-fee basis." Before investing in a fund, check its turnover ratio, a measure of how often the fund manager swaps out holdings. A turnover ratio of 100 percent means that the fund manager replaces the entire portfolio once a year.
Don't chase the latest trends. If you try to make trades based on what you hear or read in the media, you can get burned. A short-term market gyration shouldn't cause you to change your entire investment strategy, and it's best to leave trading decisions to the experts, Bold says. Fund managers typically have a research staff and analysts who become aware of what's happening in the markets well before you read it in the news.
Don't be afraid to take some risks. Since the financial crisis, investors have shunned more volatile stock funds and piled into bond funds because of their perceived safety. Experts are worried that some investors are buying bonds because they've outperformed stocks in the recent past. "We're back to normalized markets," Bold says. He says many investors may be missing a rally in the stock market because they're afraid of losing money on a day-to-day basis. So far this year, the S&P 500 Index has rallied about 12 percent, and most strategists expect the market to continue to improve heading into 2011.
Make sure you're diversified. In your stock portfolio, you should own a mix of small, mid, and large companies. You should make room in your portfolio for both domestic and international funds. For the bond portion of your portfolio, make sure you have exposure to not only treasuries, but also sectors like corporate bonds and even sovereign debt from other countries. That way, if one asset class in your portfolio gets beat up, gains in other areas will help offset some of those losses, Bold says.