You don't have to be a seasoned investor to know that sinking feeling you get when you see the value of your portfolio remaining stagnant or even dwindling. Just the thought of losing money is enough to keep some people from investing at all. But ups and downs are a natural part of the process, and losing a little money once in a while doesn't mean you're doing a bad job.
Often, the best thing to do is just wait for share prices to rise again. But below, we'll look at a few times when you may want to do something to nudge your portfolio in a different direction.
1. You're paying a lot in fees
Fees come directly out of your brokerage account, and they reduce the amount of money you have available to invest. Unfortunately, there's no way to avoid fees entirely, but there are steps you can take to minimize them.
Before choosing a broker, look at its fee schedule so you understand what it can charge you for. Note if there are commission fees for buying or selling securities. If there are, consider moving your money to a different broker that doesn't charge these fees.
Those investing in mutual funds and exchange-traded funds (ETFs) should also pay attention to expense ratios. These are annual fees shareholders pay to the fund manager in charge of selecting stocks for the fund and buying and selling when necessary. Expense ratios are typically written as a percentage of your assets. For example, a 1% expense ratio means you owe the fund manager 1% of whatever you have invested in the fund every year.
Try to keep your expense ratios under 1% whenever possible. You can still make money on mutual funds with higher expense ratios, but your savings may not grow as quickly. Index funds are one great option for investors of all experience levels looking for a low-cost way to grow their wealth.
2. You've chosen the wrong investments
If you want your savings to grow, you have to invest your money in strong companies that will perform well over the long term. These are often industry leaders today. Their share prices may not grow as quickly as some growth stocks, but they're more likely to keep climbing than many unproven businesses that are just getting off the ground.
Some people think investing is like playing the lottery, and they invest heavily in high-risk, high-reward securities, like meme stocks and penny stocks. But this is generally a bad idea. There's a much greater probability of losing everything that way.
It's also not a good idea to put too much of your money in any single stock, even if it does belong to an industry-leading company that you believe has a bright future. Stocks tend to generate strong returns over the long term, but in the short term, you could lose money amid the daily ups and downs. That's problematic, especially for those who plan to withdraw their money in the near future.
You should invest in at least a dozen stocks to ensure your money is properly diversified. This way, if one of them is down, you'll have others in your portfolio to help pick up the slack.
3. You don't have the right asset allocation
Investing all your money in stocks exposes you to a lot of risk, even if you're invested in many different companies. That's why you should keep some of your money in bonds too. Though these don't offer the same returns as stocks, there's a smaller risk of losing your money. But investing too much in bonds can slow the growth of your savings.
The general rule of thumb for retirement savings is to keep 110 minus your age invested in stocks. So if you're 40, you should have 60% of your savings in stocks and 40% in bonds. As you age, you slowly move more of your savings into bonds to protect your growing nest egg.
But when you're young, you're able to take more risks because you have plenty of time to recover from losses before you need to use your money. Still, some people find the stock market's volatility distressing, particularly when they see their portfolio's value drop. If this is true for you, consider limiting how often you check your portfolio so you don't make emotional investing decisions.
It's a good idea for everyone to review their investment portfolio at least once or twice per year to determine if they need to make any changes. But do your best to focus on long-term performance rather than short-term changes. If none of the three issues above apply to you, you're probably better off just waiting and watching.
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