Needless to say, the market appears to be at an all time high at 8,000. Probably more noteworthy than this fact, though, is how quickly it’s gone from 4,000 to 8,000. This move of historical proportions propagates a myriad of issues. I hope all of my readers are on the positive end of this upward spiral in the market. However, because I’m a lawyer, most of my articles focus on the negative, as opposed to the positive.

Is Your Portfolio Broken?

There is an old cliché that if something is not broken, don’t fix it. That applies as much to investing as anything. Knowing if your portfolio is broken causes many people to make unwarranted adjustments to or trades in their portfolios. Douglas J. Schulz, a registered investment advisor here in Colorado Springs, spends considerable time advising people on whether their portfolios are broken in the first place. People are questioning their portfolio performance against the backdrop of the meteoric rise in the market. It isn’t so much where the market is - at 8,000 - as much as what the market has done to get there. In the past 3 years, the market has gone up by approximately 70%. You wouldn’t be human if you hadn’t looked at your own portfolio and queried, "How come I’m not up 70%"?

There is always someone waiting and willing to tell you, "I know why you are not up 70% and I can fix your portfolio." The problem with this is that the person speaking those words has a conflict of interest - he is either trying to generate commissions, win a trip, or just steal your business from someone else. There are plenty of Americans who have severely under-performed in the last few years. Many of them do need to make dramatic changes in their portfolios. However, as opposed to additional trading, what may be necessitated is a new look at the investment style or the current investment manager.

New Wealth

The move to 8,000 has created billions of dollars of new wealth for millions of Americans. A large percentage of this wealth has been in profit sharing, 401K and company stock purchase plans. There are even those who argue that these tax exempt entities are not only the beneficiaries of this bull market but also the cause - due to the vast amounts of money that flow into them on virtually an automatic basis each year. Hopefully, you are the recipient of such a plan. The trick is to ensure that you are benefiting to the largest extent possible. The one advantage of benefit and retirement plans is that if there is any trading, there are no capital gains taxes. But that doesn’t mean that trading and costs should not be a concern.

Greater wealth necessitates decisions regarding what to do with it. I have some good-humored clients whose life savings were wiped out by their stockbroker. They now say to me, "Tracy, the good news is that we no longer have any money problems - because we have no money!" The question to ask yourself is why are you trading in the first place (a pertinent question whether you have a retirement plan or not). In previous articles, we discussed why your broker may be encouraging you to trade. But you need to assess yourself why you need to trade. Don’t get me wrong - portfolios occasionally need tweaking, but unless you have some special skill to guess the next hot market area, you are probably better off staying where you are.

If you’re trading in loaded mutual funds, you have a pretty steep front end load to overcome. If you’re trading in stocks and bonds, you have to overcome both the spread (the bid and the ask), as well as the commissions. Too long a subject for this article, but there is always the debate about outguessing the market. Why would you sell what you are in? Because the stock is going down? Some would argue that the stock is a better buy now than when you bought it. On the flip side, are you selling because the stock is going up? There are millions of investors who wish they had never sold their Coca-Cola stock that climbed higher and higher year after year. I’d rather see long term fine tuning and adjustments made to make a portfolio more or less aggressive, as opposed to heavy trading activity.

One very valid reason for making major changes in your retirement portfolio with the market at 8,000 is if, for one reason or another, you are pulling out large sums of money over the next year or two. The market may not have peaked at 8,000 (I thought it was oddly high at 7,000), but if the market should make a serious pullback in the next year or two, then creating more cash may be less crucial, as long as you can ride out any correction.

If you think you’ve under-performed, make sure that you are properly measuring your performance. Performance of your portfolio in a comparative analysis must always be done with your investment goals, guidelines and risk tolerance in mind. If you do conclude you’ve under-performed with the market at 8,000, be extremely careful of making changes to your overall investment philosophies. How the market will perform over the next few years is anybody’s guess, however, a decision to alter strategies in order to match the Dow for the last few years could be a fairly dangerous hindsight move.

Tracy Pride Stoneman is an attorney specializing in investment related complaints. Email her at Tracy@InvestorFraud.com. Preparation of this article was assisted by Douglas J. Schulz, a registered investment advisor and former stockbroker in Colorado Springs.