Tempted to tinker? Make investment changes carefully

Resisting the urge to react to changing stock market conditions can feel a little bit like trying to keep from scratching an itchy rash. Most investors know that the impulse could make their situation worse in the long run, but they have a hard time stopping themselves anyway.

After all, when the market is going up and word is spreading about stocks that have quadrupled in value, people want to make sure they get a piece of the action even though logic would dictate that it might be better to buy when prices are low. The same is true conversely, when the market tanks and people sell stocks in a panic despite their long-term investment strategies and goals.

"Everyone says they're a long-term investor who buys and holds, but then they get emotionally involved, so they try to time the market. At the peak is when most people get in, which is the worst time to get in, but when most people get out is when they should stay in," said Bill Altman, a financial representative with Wellesley Financial Group & Insurance Agency in Wellesley Hills, Mass.

For Altman and other financial experts, there are times to tinker with your portfolio, and times not to.

The most important time to reallocate your investments comes with a significant life change.

"Any personal changes like birth, death, marriage, divorce, retiring sooner, retiring later, inheriting money -- all of these factors will potentially change your portfolio," said Michael E. Goodman, president of Wealthstream Advisors in New York. Advisers say that each life change creates the need to adjust your portfolio to reflect a change in investing goals.

Even aging is considered a life change. Most advisers recommend making your portfolio more conservative as you grow older, because the closer you are to retirement, the less time you have to make up for a high-risk roll of the dice.

The most important time not to tinker, advisers say, comes when your emotions are running high because of swings in your portfolio. It's not that you shouldn't consider reallocating as market conditions might dictate, but you shouldn't react to every blip, financial experts say.

They also say investors can help prepare for the market ups and downs by building flexibility into their stock portfolios from the outset, knowing what red flags to look for and regularly checking in with their professional adviser.

Resisting the urge

James Boal, MD, said he generally has resisted the urge to significantly revamp his stock portfolio as market conditions have changed.

"I'm sort of a conservative player," said Dr. Boal, a family physician and medical director of Angela Hospice in Livonia, Mich. "By waiting [out] the news, there's generally stability in the long run."

"Of course there's temptation," he added. "There's a sense that if you don't act now, you're going to lose a lot of money. But in reality, you want to try to be mostly faithful to your stocks and not be too reactionary."

Dr. Boal said most of the adjustments he made in his portfolio had been based on recommendations from his adviser, Nathan Mersereau, president of Oakland Wealth Management in Southfield, Mich.

Mersereau said physicians might be particularly susceptible to the temptation to overreact to a changing market, in part because they are subjected to substantial peer pressure to be top achievers. "There's a big thing physicians value: It's being best and being right," he said.

Altman said physicians also might feel extra pressure to have high-performing stock portfolios because they often have shorter careers than other professionals, meaning less time to save for retirement, and they also might have started out with large debts from medical school.

"They have to be more on top of things, because they are starting at a little bit of a deficit," he said.

Like other investors, physicians also can be swayed by news reports about surging or tanking stocks. But Mersereau said most of those reports primarily benefit short-term investors and wouldn't be helpful to those trying to adhere to a long-term strategy.

"It's more important to look at the trend of information versus the specific piece of information," he said.

Mersereau said many investments, like those in mutual funds, are monitored by a professional who can look out for significant changes that may require portfolio adjustments. But he said that if an investor notices a trend emerging over time, it could warrant a change in the portfolio mix.

For example, Mersereau said, bond investments might be less appropriate in the wake of a significant hike in interest rates, so that could signal that it was time to reconsider what percentage of the portfolio should be in bonds, stocks or cash. It also could warrant the re-evaluation of investment goals and risks. Lastly, he said, market conditions should be considered.

"Keeping an eye on the market in general, looking at that on a quarterly basis and then evaluating your holdings relative to that benchmark," might be a good way to evaluate whether your portfolio is keeping pace with the changing market conditions, he said.

Christopher Casey, a vice president and portfolio manager at Boston Private Bank & Trust, said investors with a long-term perspective should be prepared to ride out those downturns.

"We tell people that you should not be investing if you can't ride out a full market cycle, and we say that's a full five years," he said. "Over a full market cycle, if you believe in the growth of economies and businesses, you believe that will translate into the growth of a well-diversified stock portfolio."

The portfolio might perform better or worse under varying market conditions, but Altman said there was no single magic number that could be used as a benchmark for everyone to signal when adjustments are necessary.

Over time, investors might need to rebalance their portfolios to return to the allocation mix that is best suited to their goals, Goodman said. That's because a portfolio could see strong growth or loss in certain types of investments over several years, making them disproportionate to the original allocation.

"It takes a lot of discipline, but if you have a long-term perspective, you're rebalancing," Goodman said.

That rebalancing could end up costing a lot, which is why Goodman recommends making investments that allow changes without a lot of fees, such as those without surrender charges or those that are traded a lot so they are easier to sell if needed.

Still, investors might have to pay transaction fees when retooling their portfolios. Much of that depends on the size of the portfolio and the value of the investments. Goodman said fees also vary based on who is managing the investment.

Any changes also could have tax consequences. Goodman said seeking help from an accountant might help shed light on those expenses and could show whether there are other assets in the portfolio that can be harvested to offset gains.

Most financial experts say investors should meet with their advisers at least once a year to see if their portfolios need any adjustments. Even if the investor's strategy is to stay on one course for several years, they say that life changes could warrant some retooling.

There could be other red flags to indicate that changes might be warranted, such as news of a dramatic change in interest rates or other economic indicators. But most financial experts say investors should be cautious when considering these developments, just as they would with news reports about market swings and stock performance.

"One of the things you want to pay attention to is whether there is a change in policy that affects the market. Did the Federal Reserve try to change their direction on interest rates? Is there a huge tax cut? Why are those things happening? Is the economy drastically weakening?" Casey asked. "But I would always recommend that clients not react to movements in the stock market. Six months is too short of a time to evaluate any sort of long-term trend."

"People tend to overreact, and setting a course and sticking with it through the tough times tends to pay off," he added.

For now, the market appears to be continuing in an upward trend. But Altman and other experts questioned whether the market predictions are meaningful.

"Anyone who says what the next 12 months will hold about financial conditions is not telling you the truth," because they don't know, Altman said. "And if you have those long-term investing principles, understanding of the concepts and good diversification, you shouldn't be worrying about it."