With the Dow Jones industrial average hitting numbers that haven’t looked so sweet since 2007, what should you do with that chunk of change you’ve got sitting in — or out — of the market? If you’re out, should you jump in? If you’re in, should you cash out?
Reuters columnist John Wasik suggests that now would be a good opportunity to do a sober review of your portfolio:
“The name of the game for most investors is preservation of capital. It’s not about what you make on the upside, it is what you keep on the downside. You may need to rebalance or add growth stocks. Just take your time and do not feel like you are late to the party when the market soars. Look at it as just another opportunity to ask yourself if your portfolio is following your plan. The market has a mind of its own.”
Questions you need to ask, Wasik says, include:
Is your portfolio beating inflation?
“Last year, the CPI rose some 1.7 percent, although I know that medical and college expenses are at least double that. Health spending climbed almost 4 percent in 2011, the most recent year available, according to Health Affairs, a policy journal,” he says.
“Since my family is particularly sensitive to medical and college expenses, I use a personal inflation gauge that targets these costs. So if our portfolio does not return more than 4 percent after fund expenses, it is not keeping up with the kind of inflation that hurts us most.”
Are you meeting other benchmarks?
“You will also want to measure your returns against a benchmark fund, to see if you are getting the most out of your investments … The idea here is to match your portfolio with the appropriate benchmark fund, which gives you a basis for after-expense returns. For holdings dominated by large U.S. stocks, use a S&P 500 index fund,” the article notes.
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