Midyear Portfolio Tips
By Ron DeLegge, Editor
June 26, 2008

SAN DIEGO (ETFguide.com) - Look at your calendar. We’ve already reached the half-way point of the year. How’s your portfolio doing?

Right now is a good time for all diligent investors to take a little time to evaluate the health of their investments. Is your portfolio progressing or digressing?

Diversification
Contrary to the view of many, diversification, if properly applied, is not “diworsification.” True diversification is a prudent activity that’s all about having broad exposure to multiple asset classes. These various types of assets include not just domestic and foreign stocks, but bonds, commodities, and REITs.

Can I really say I’m diversified if I own five mutual funds, ETFs, or stocks that all do the same thing? Probably not.

Even though many people suffer from under-diversification, over-diversification is equally problematic. Owning too many mutual funds, ETFs, or stocks can likewise undermine your financial goals.

If your portfolio happens to be underperforming, there’s a good chance proper diversification is the missing ingredient.

Cost
Many investors have tricked themselves into believing the cost of their investments doesn’t matter.

Part of the problem is they’ve been brainwashed by Wall Street’s salespeople that you only get performance if you pay for it. Hogwash! What people fail to acknowledge is that there is a relevant correlation between high cost mutual funds and market underperformance.

According to research from the Vanguard Group, the ten-year annualized return of large cap mutual funds with the highest expense ratios was a disappointing 5.20 percent versus a better 5.92 percent for funds with the lowest costs. The same widespread underperformance was reported for mutual funds with the highest cost in other categories, like bonds, mid, and small cap stocks.

Are you making the mistake of turning a blind eye to your investment costs? And what decisive action are you taking to reduce the cost of your investments? Are you really keeping your fair share of investment returns?

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Risk
Risk is not just about standard deviations and Sharpe ratios. It’s about making certain that your portfolio’s holdings are compatible with you.

Ask yourself: Do the investments I own truly reflect the amount of financial risk I can handle? Do I know what my maximum level of acceptable risk is? And how can I eliminate the risk of owning individual stocks, underperforming fund managers, and investments that increase my tax bill? Only you can answer these questions, no one else.

Performance
Has my investment portfolio been keeping up with the market or is it falling behind? If you’re like most investors, your portfolio is not keeping up with the market. One way to find out how you’re doing is to look at your monthly account statement. This is the document that you’ve probably been putting into the shredder.

If you want to know how you’ve been doing over the past year, simply compare the total value of your portfolio today as reported on your most recent account statement versus what it was worth during the same exact month of the previous year. Don’t forget to subtract any contributions you made to your portfolio over the past year. 

Take all of these values, put them into your calculator and press a few buttons. It should tell you if you’ve had a gain or a loss. Then, compare that gain or loss in percentage terms to major benchmarks, like the S&P 500 or Lehman Aggregate Bond index over the same period of time. Using recognized benchmarks as a barometer is the correct way to see if you’re making progress. Other reference points like peer group comparisons, star ratings, or fund rankings don’t tell the whole story.

Summary
A midyear evaluation of your investments will help you to keep your portfolio on track.

Diversification, cost, risk, and performance are key factors that all serious investors should constantly review. If you’re failing in any of these areas, index funds or index exchange-traded funds (ETFs) are just the tools to help you fix what’s wrong.

And remember: Once you fix it, don’t break it!

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