Investment Management – How to Manage Your Portfolio

The first step in growing an attractive garden is to carefully select and place the different types of plants.  You need taller plants in the middle or back and smaller flowers in the front, and need varying types of blooms and foliage to add interest.   You use both perennial plants that stay year after year for their reliable blooms and to avoid having a bare garden in the winter and showy annuals to add some vibrant colors in the summer.  Perhaps you place an ornamental tree or shrub as a focal point.  You also plant flowers that bloom at different times so that there is always color.

Once you have planted the garden, you need to constantly trim and adjust to maintain the form.  If you were to simply drop in the plants and walk away (as my wife often does), you would return several months (or several years) later to discover that some plants will have died while others will have grown out of control.  You might find that the day lilies have multiplied beyond control like a cancer and now consume the whole area.  You might find that  the cosmos’ are now growing like weeds and that your delicate oriental poppies are nowhere to be found.

In an investment portfolio, you also need to diligently select the components.  You have your perennial stocks – the companies you plan to hold onto indefinitely and which will require little care.  You also need to select assets for income such as bonds that provide high yields for a fixed period of times.  You need to add elements that perform in a manner that is uncorrelated to stocks and bonds such as real estate so that you reduce the chance that everything will go down at one time.  Finally, you need to include boring short-term cash assets such as CDs and money markets to take care of current expenses and protect funds that you need in the near-term.

Once you have planted your portfolio, however, you need to perform periodic maintenance.  Like that cute little privet you placed near the house, you may find that some of your long-term investments become very successful  and grow out of control.  While this may be a desirable result, too much of your money may end up tied into one stock.  Investors in Freddie Mac and Fannie Mae were delighted with the returns they received for years and many who invested a few thousand dollars in the 1980’s would have become millionaires by the year 2005. They could have seen vast fortunes disappear, however, during the 2008 crash if they simply let their money grow unbounded.  Like that rampant privet, one must periodically cut a rampant investment back and spread the money into other assets.

Likewise, like the bright annuals that disappear and need to be replaced, bonds expire or are called periodically and need to be replaced.  This does not happen all that often, but if you don’t check once in a while you may find you have a bunch of cash and no current income assets.  Ideally you want to time your bond payments such that they are spread out over the year or occur just before large expenses are due (such as property taxes or car insurance renewals). 

Finally, just as some plants will just not grow well, some assets will just shrivel and need to be pulled out to allow something more productive to be placed in their location.  This should not be done lightly, since stocks do have short-term issues and then rebound vigorously once they are resolved.  If there is something fundamentally wrong with the  company or business, however, it is best to cut your losses and find a new investment.

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Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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