| Top Ten Portfolio Pitfalls |
| Whatever problems you encounter in your own portfolio, you're not alone. Plenty of other investors get tripped up by the same stumbling blocks. During my 10 years as a financial planner, I've found that there are 10 mistakes that most investors make. |
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| Check and see if any sound familiar. Looking for the following problems in your own portfolio will help you think about your portfolio as a whole, not simply as a collection of individual investments. |
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| 1. Not defining objectives and priorities |
| After owning them for a long time, it's easy to forget that the funds in your portfolio are there to do a job. Take the time to think about what that job is, and whether your needs or expectations for that investment have changed. It may be time to sell some of those funds. |
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| 2. Lack of a focused core |
| If you find yourself staring at a long list of funds and aren't really sure why you own them, your portfolio probably lacks focus. For each goal that you have identified, you should have a core group of three or four funds that are proven performers. The bulk of your assets--typically 70% to 80%--should be in these funds. For most people, large-cap funds will probably make up the core of their portfolios. Simplify by focusing on a few funds that can deliver what you want and gradually add to your investment in them rather than adding more funds to your lineup. |
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| 3. Putting too much outside the core |
| Use additional funds for diversification and growth potential. For instance, if your core is made up of large-cap funds, you might want to add small-cap, international, and sector funds for diversification. |
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| While you probably wouldn't want to put a significant portion of your portfolio in any one of these types of funds, they do allow for the possibility of extraordinary returns. Of course, they also generally carry a higher level of risk. But as long as you limit the more-risky portion of your portfolio, you aren't likely to threaten the bulk of your nest egg. And for some people, core funds may be all they ever need. |
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| 4. Imbalance |
| A well-constructed portfolio is a balanced portfolio. If you see something that "sticks out," you need to determine whether it still fits your risk profile. Imbalance happens when some categories do very well or very poorly. |
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| A portfolio that was balanced three years ago would be totally out of whack today if it hasn't been rebalanced. If you had invested 25% of your portfolio in intermediate-term bonds, 10% in international stocks, and 65% in U.S. stocks, your allocation today would be starkly different: just 17.5% in intermediate-term bonds, 7.5% in international stocks, and a whopping 75% in U.S. stocks. That portfolio is much riskier today than it used to be. |
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