3 Ways to Spring Clean Your Portfolio

Wealthy man with a feather duster

With the cold winter weather starting to thaw, it's a great time to tackle those spring cleaning projects -- not just at home, but in your portfolio, too.

The market's recent rise makes it a little easier to tackle the three tasks below. After all, it's much more fun to lock in a gain than it is to admit defeat and settle for the consolation prize of a potential tax loss write-off.

Clean-up tip No. 1: "Sell" every investment you own.

If you've got a life outside of your investments, you may be waking up this fine spring morning to find that your portfolio has become a collection of stuff you picked up along the way, rather than a concerted investment plan.

By acting like you plan to sell every investment, you'll best know which are the ones you're able to part with now, thanks to the market's recent generosity.

To get this perspective, put each investment into context and assess which ones are worth holding, take a look at each position you hold and fill in the blanks: "I own _____________ because of __________. I'd be willing to sell if ________________."

Whatever your reasons for owning each investment, ask yourself if it still makes sense for you to do so. You may find that the market's recent rise has generously given you exactly what you need in order to justify moving your capital to a more productive use. And if some haven't reached your sell criteria yet, you've made a list you can refer to later when they do.

Clean-up tip No. 2: Adjust your investments based on your timelines.

Next, you can use the proceeds from any sales to adjust your holdings based on when you'll need the money. This is important to assure that the cash will be there when it's needed.

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Money you need in the very near future -- in the next year or so -- should be either in cash or in something like a CD or a maturing Treasury bond that will automatically turn into cash by the time you need it. At today's low interest rates, even some bonds can be too risky to own for short term money, especially ones that are years away from maturing.

The longer you have before you need the money, the more risks you can take with it.

Respect the calendar. The market doesn't care when you'll need the money or how much of it you'll ultimately need. It took us more than five years to reset to the market highs from the last time stocks peaked.

Unless you've got somewhere in the neighborhood of that kind of time to wait for the next set of market highs before you need to spend the money, take today's high prices as a gift. As they say, a bird in the hand is worth two in the bush.

Clean-up tip No. 3: Reallocate to balance the risks you face.

By paying attention to how your money is allocated across investment classes, you'll be better able to manage across the variety of risks you face by investing. Remember, over the long run, there's no such thing as a risk-free investment. Here are the key risks facing common investment types:

  • Cash -- Abysmally low interest rates means that holding cash means losing ground to inflation, especially after taxes. And while other countries may have higher interest rates, holding their cash exposes American investors to currency fluctuation risks, as well.

  • Bonds -- Those same low interest rates mean that bonds face insanely high interest rate risks and can lose a ton of value when rates rise.

  • Real Estate -- In spite of the old maxim that they're not making any more land , remember that the recent financial panic and global economic meltdown was started by a real estate crash.

  • Commodities -- As Warren Buffett has famously said, "The problem with commodities is that you are betting on what someone else would pay for them in six months. The commodity itself isn't going to do anything for you."

  • Stocks -- No matter how wonderful the long term wealth creation prospects are in stocks, they can be incredibly volatile from day to day. Also, the company behind any individual stock can go bankrupt, with the common stock investors last in line for any meager recovery.

As a result of that reality that there is no such thing as a risk free investment, the best you can do is balance your risks by reallocating your portfolio across asset classes. It's largely a personal choice how to allocate, but remember to look at your total financial picture -- including your retirement accounts -- when you do.

Put a portfolio spruce-up on your calendar now

Use all three tips together, and you've got a simple portfolio spring cleaning strategy that will help assure your money works for you as hard as you worked to earn it in the first place.