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Follow this step-by-step guide to get your portfolio back on track. (Sasiistock/Getty Images/iStockphoto)
Follow this step-by-step guide to get your portfolio back on track. (Sasiistock/Getty Images/iStockphoto)


How to make your portfolio great again Add to ...

You started out with the best of intentions. You vowed to diversify, keep your costs down and maintain an appropriate mix of fixed income, equities and cash.

And, for a while, it worked.

But then – maybe through laziness, greed or a bit of both – you started to let your portfolio go. You began dabbling in a few risky stocks that didn’t pan out. Or you let your equity weighting climb well above your self-imposed limit. Or you held on to that foreign mutual fund that charges an egregious 2.5 per cent because you’re waiting for it to get back to break even.

Well, today, we’re going to fix your portfolio. We’re going to – please don’t read anything political into this – make your portfolio great again.

Here’s what we’re going to do.

Sell those pooches

Let me make one thing clear: I would never recommend selling a stock just because it has dropped in price. For great companies with a solid future, that’s the time to buy more. But if you hold broken companies or speculative shares that have fallen and can’t get up – and may never get up – then selling makes sense for a couple of reasons. It frees up your money to invest in something more productive and, if you’re investing in a non-registered account, it gives you a capital loss that you can use to offset capital gains for tax purposes. You must first use the loss to offset gains in the current year; any remaining losses can be carried back up to three years or forward indefinitely. For more on tax-loss selling, see my column.

Stop trying to break even

On a related note, some investors are fixated on waiting for a losing stock to recover to its purchase price before selling. Why? Because it’s less painful than taking a loss. The technical term for this behaviour is “anchoring” and it can be counterproductive. In fact, the price you paid is history and should have no bearing on whether you hold or sell. All that matters is how you expect the stock to perform now. If the outlook is lousy, then waiting to break even – which could take years or may never happen at all – is a mistake. Better to take your lumps and move on.

Focus on quality

Ultimately, your goal should be to own only the highest-quality companies that let you sleep well at night. In my own portfolio, I buy only stocks that raise their dividends regularly – including banks, utilities, pipelines, real estate investment trusts and large consumer stocks. (For some examples, see my Strategy Lab model dividend portfolio). Although I invest primarily in dividend-paying stocks, I also hold several exchange-traded funds and a couple of low-cost mutual funds that I sometimes use to “soak up” the cash that’s accumulated in my account. For people who don’t have the time or expertise to manage a portfolio of individual stocks, ETFs are a great option.

Rebalance if necessary

Rebalancing means bringing the asset allocations in your portfolio back to their original targets. Keep in mind: Not everyone thinks rebalancing is necessary and those who do think it’s necessary don’t always agree on how often it should be done. But rebalancing has value in that it can help to control your risk. Let’s say you started with a 60-40 mix of stocks and bonds (or guaranteed investment certificates), but because your equities have done well over the years your stock-bond allocation is now closer to 80-20, which is too risky for your liking. You could sell some of your stocks (be mindful of capital gains taxes in a non-registered account) and put the proceeds into fixed-income assets. Alternatively, you could direct any new cash – or dividend and interest income – into bonds or GICs to bring the allocation back toward your original target.

Control your costs

With intense competition among ETFs and mutual funds, investing costs have been falling. If you’ve held a certain fund for years, you may be able to find a lower-cost option that does roughly the same thing. The Vanguard FTSE Canada All-Cap Index ETF and the iShares Core S&P/TSX Capped Composite Index ETF, to take two examples, give you broad coverage of the Canadian market for a rock-bottom management expense ratio of 0.06 per cent. That means virtually all of your money will be working for you, which could significantly increase your returns over the long run versus a fund that charges a higher MER.

Consider cash

Markets have been on a roll this year – the S&P/TSX composite is up about 12 per cent year-to-date, excluding dividends – and at times like this it can be tempting to plow all of your cash into stocks. The problem with that approach is that, when the inevitable setback happens, you won’t have any cash to invest in the bargains that may emerge (unless you want to borrow, which I advise against for all but the most experienced investors). You don’t necessarily have to sell stocks now to raise money, but building up a cash reserve over time is a prudent strategy.

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Follow on Twitter: @johnheinzl

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