As I review my loss-leaders leading up to the end of 2012 for tax purposes, I'm realizing I need to be honest about some of my holdings. I thought I had purchased some bargains during the recovery, but many of my "bargains" remain at bargain prices. What advice can you give to someone staring at a portfolio rife with poor-performers?
Great question, Marvin. There are many schools of thought on this topic so I would expect a diverse group of answers.
We often here the saying, "cut your losers and let your winners ride/run." Well, how do you actually define which stocks are winners and which are losers? You might have purchased Apple in 2000 and sold it at a loss a few years later, convincing yourself it was a "loser." I think we both know how that story would have ended. In contrast, you might have owned a company like Research in Motion and considered it a "winner" while riding the stock up to $140+ in 2008. The stock trades for $8 today.
When working with clients I stress to them the importance of knowing what they own and, more importantly, why they own it. We have a fundamental reason for each position we hold in a portfolio. If you don't have a good reason you might consider removing the position(s) and finding a more appropriate investment that will help you reach your goals.
It is important to continue to keep your time horizon in mind as you make these decisions as well. According to an analysis by Dalbar, the average investor earned 2.1% over the twenty year period ending Dec. 31, 2011. The S&P 500 index returned 7.8%, while the Barclays Capital US Aggregate Bond Index returned 6.5% over the same time period. Furthermore, inflation (CPI) grew at an annualized rate of 2.5% during the period. So the average investors' net real return was -0.4%. The reason? I might argue that the average investor often lets their emotions get in the way of making good investment decisions. Determine your risk tolerance and time horizon, design an asset allocation that is appropriate for you (or seek the help of an investment professional), commit to a plan, and you will succeed.
Hi Marvin, my stock answer (pardon the pun!) is to always own a well-diversified portfolio (a mix of stocks, bonds, real estate and natural resources). So if you find you have a concentration of poor performers in any one industry/asset class, by all means consider selling some of your losers (especially if you can use the losses to offset some capital gains on some of your winners).
I always think a great question to ask yourself in this situation is, "If I didn't own this stock now and had cash on hand to buy it, would I?" If the answer is yes, then stick to your guns and be patient. If the answer is no (usually more like "No way, that stock is a dog!"), then sell and put the proceeds to work elsewhere (buiding that well-diversified mix of investments). Going this route takes a good deal of self-examination--can you really be honest with yourself? But it never hurts too, to get a second opinion (as you are doing here by asking for advice). Remember what Dirty Harry said: "A man's got to know his limitations."
Marvin, I think the best advice a financial advisor can give is to hire a financial advisor. After all, if we don't believe in the services we provide, perhaps we should seek another profession. But truthfully, not jsut any advisor, but one that can demonstrate that  he or she has the tools and processed to properly identify funds that are like to do well going forward (not hindisght), and  uses those tools and resources on an ongoing basis to continually monitor key mettrics to increase your opportunities for success, and indentify also when changes are needed. In my opinion, the theory of buy and hold is only effective if things move constantly in an upward line. My motto instead is to buy and adjust. After all, you should get a premium value for the "professional advice". Best wishes in your endevors. Feel free to contact me should you need additional assistance.
Marvin, Portfolio construction is a very complicated bussiness. What to buy, what to sell, when to buy and when to sell. Our mandates to own assets are very deciplined. Create your own mandates and guidelines and adhere to a strict decipline of managing that decipline. If that becomes too difficult, then hire a money manager that is in close agreement with your views and let him do the work. Hope this helps. Good Luck, Dan
Hi Marvin, You must start from the very beginning of the financial planning process. You must start by examining what your goals are. You can’t assume that the assumptions you had even a few years ago are still valid. You really must be brutally honest in your examination and not indulge in wishful thinking.
These and other questions pertaining to your individual circumstances should be asked. Once you have a grasp as to your circumstances and frame of mind, you now can examine your holdings.
Divide your assets into three categories.
A. Those assets that have held up well and are doing what you intended them to do. B. Those assets that have declined in value and will most likely never recover. C. The most difficult category, those assets that have declined in value but may recover when the economy recovers.
Liquidate those assets that are not performing and are no longer useful based upon your current market assumptions.
With your new risk tolerance, income needs, and other factors that are unique to yourself in mind, deploy your now liquid assets into areas that are working in this market climate.
You may find this process difficult to do by yourself, which is why you may want to consult a Financial Professional with plenty of experience.
Besides all the other good answers above, here is another simple way to know. If there has been a significant change in your life or lifestyle (marriage, divorce, job change or loss, retirement or pending retirement, birth of a child, death f a close relative, etc.) it is a good time to sit down and review your portfolio.