4 Effective Portfolio Management Tips

April 26, 2016

Creating and managing a portfolio of funds can be challenging at times.

With thousands of funds available, investors have to decide what funds to buy and also when to sell them.

They have to consider potential trading fees and tax consequences, and they may need to adapt their approach depending on the size of their accounts.

Here at FundX, we’ve been managing fund portfolios since 1969, and over the years, we’ve found that there are a few key ways for investors to stay on top of their fund portfolios.

Here’s four tips that have worked for us for decades:

1. Plan to Take Action

Many investors tell us that even when they know what to do, they have trouble taking action.

They know what funds they want to own, but they’ll spend months, or even years, waiting for the ‘right’ time to buy in.

Or they have funds that they want to sell, but they continue holding the funds because selling them would feel like they’d made a mistake.

We’ve found that investors are more likely to take action if they have a clear plan in place. It helps to write down exactly how you plan to get invested or when you’re going to change your fund portfolios.

By deciding in advance what action you need to take and writing it out so you can refer to it later, you may be more likely to follow through, even as markets change.

2. Manage the Impact of Trading Costs

Trading funds often comes at a cost. Most investors trade funds at a broker, and brokers tend to have some funds that are available without a transaction fee (these are called ‘NTF funds’), while other funds come with a transaction fee (‘fee funds’).

Transaction fees can be substantial, particularly for investors who are managing smaller accounts. Consider that if you invested $500,000 in a fund with a transaction fee of $75, the transaction fee would be a tiny fraction of your overall investment. But if you invested just $7,000 in a fund with a $75 transaction fee, you’d have paid over 1% before the fund made a dime for you.

Some funds charge investors a redemption fee if investors sell their shares within a certain period of time (often 90 or 180 days) and brokers often have their own short-term trading policy. These can also eat into returns.

No one likes getting hit with an unexpected fee. So take some time to review what fees your broker charges and decide in advance how you’ll handle them. Depending on the size of your account, you may decide to focus on no transaction-fee funds. We suggest holding funds a minimum of 90 days to avoid most broker redemption fees.

3. Be Alert to Tax Consequences

Investors who hold funds in taxable accounts should keep in mind the potential tax consequences of their trades.

You will pay taxes on any capital gains realized when selling a fund, so you’ll want to keep track of how long you’ve held a fund before you sell it. Since losses can be used to offset gains, you may need to consider whether it would be advantageous to sell a fund at a loss.

You’ll also need to trade carefully at year-end when many stock funds distribute capital gains and income to shareholders. Most funds make estimates available starting in November and you can use these estimates to avoid buying into a fund that’s about to make a large distribution.

4. Take Care of Your Smaller Accounts

Many investors have more than one account. You might have a retirement account through your employer as well as your own Roth IRA, for example. It’s easy to focus on your largest account, since that’s where you own the bulk of your investments, but don’t neglect your small accounts.

You may need to adapt your approach to suit the size of your account. For example, if you have a smaller account, you’ll want to be particularly mindful of trading fees. We often suggest that investors who have smaller accounts try to avoid transaction-fee funds, and instead focus on NTF or no-transaction-fee funds.

Since most funds require a minimum investment of $1,000 to $5,000, you may find it challenging to own enough funds to truly diversify your exposure to both stock and bond funds. You may find it’s best to focus on core positions and avoid potentially riskier stock and bond funds.

Or you might decide to offload part of your portfolio to a professional advisor, like us. If you enjoy managing stock funds, you could hire us to manage your fixed income investments for you.

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