You are free to switch your investment choices whenever and as often as you want. The question is, when should you make a change?
Finding the answer isn’t always easy. While only you can decide the best strategies to use, here are some general reasons why you might consider switching investment portfolios.
Changes in your personal life
If you experience a significant change in your life, such as marriage, a new child, divorce or death of a loved one, your investment goals may change significantly. If so, you may want to alter your asset mix to reflect more current investment goals, as well as risk tolerance.
As you near retirement, your investment strategy may become more conservative, and you may want to move some of your money from stock portfolios into less volatile investments.
Changes in the economy
If the economy experiences a significant change, such as inflation or recession, you should make sure the portfolios that you are invested in have the potential to perform well in the current economic environment.
For example, if your money is in a small-cap-growth portfolio during an economic expansion, you may want to consider making a switch if the economy slows down. However, you probably won’t want to make any major changes if you think the economy is experiencing a temporary blip. For example, a one-day drop in the stock market generally isn’t a valid enough reason to dump all of your stock investments.
Changes in the portfolio
If you notice significant changes in a portfolio that you own, you may want to consider making a switch. For example, if the investment performance of a mutual fund has taken a long-term turn for the worse, ask your financial advisor to take a thorough look at the portfolio and at its sector, if it’s a sector fund. You may want to switch not only out of that fund, but also out of its entire sector.
If a portfolio has a new manager, watch the portfolio to see if there are any significant alterations. If the portfolio’s investment strategy has changed — such as becoming more aggressive, more conservative or less diversified, for example — it may no longer match your personal investment strategy. You and your financial advisor may then decide to switch to a new portfolio.
Reasons not to switch
As a long-term investor, you should be cautious about switching investment portfolios. Changing investments at the wrong time could cause you to miss out on future gains. If your decision to switch is based on changes in the portfolio or the economy, be sure that those are long-term changes and not temporary conditions.
Even if you have concerns about a portfolio, there may be reasons to hold on to it a little longer. If, for example, the portfolio has an investment philosophy that exactly matches yours. If you have faith in the investment manager’s judgement, you may want to wait and make your decision about switching in a few months.
If you do switch
Before investing in any new fund, do your research. Make sure that you achieve or maintain your desired allocation among stocks, bonds and money-market investments. Don’t base your choice solely on past performance. A portfolio that was hot last year may fizzle this year.
In addition to looking at a portfolio’s long-term performance record, consider the outlook for economic growth, inflation, interest rates and the market as a whole.
Bottomline, the better informed you are, the more confident you can be about your investment decisions.
This column is produced by Financial Planning Associates, and is provided by R.Hutton Cobb, a Wachovia Securities financial advisor in Greenville, N.C.