Keeping Your Balance: A Systematic Approach to Monitoring Your Investments

When it comes to monitoring portfolio performance, most people belong to one of two schools. The first takes the old maxim “buy and hold” to an extreme. People who belong to this school tend to do nothing at all about their portfolios, trusting that market forces will eventually work in their favor. The second is sort of like an ER nurse, constantly scrutinizing vital signs and rushing to “fix” the latest crisis. People who belong to this school are likely to buy and sell frequently, with no clear sense of the bigger, longer-term picture.

Where's the Game Plan?

The problem with both approaches is that they leave no room for a measured, systematic approach.  One group of people is stuck in place due to fear of doing the wrong thing.  The other is motivated to act out of fear of missing an opportunity.  Truthfully, in the current climate, many people did nothing while things were going down and are doing nothing as things make an apparent – if hesitant – recovery.  People who may have been afraid to look at their portfolios over the past few months may be breathing a sigh of relief.  But this is no time to make decisions by emotions alone.  Fortunately, there is a much better approach – one that involves a game plan developed in conjunction with your financial advisors.

Elements of the Plan

The game plan does not have to be elaborate at all.  In fact, the best plans are fairly simple.  They involve an annual portfolio review in which you sit down with the person managing your portfolio and perhaps your CPA to look at what’s happening in the marketplace and how it’s impacting you.  A good comprehensive review will touch upon four things:

  • Your investment time horizon and likely need for liquid assets for retirement, college education, home purchase, etc.
  • Your tolerance for risk and how well your portfolio matches it under current market conditions.
  • Your financial goals and how well your portfolio seems to be poised to help you achieve them.
  • Allocation of your assets among different asset classes:  sectors; size (small/mid/large cap); geographic; bonds, cash, etc.

This annual review – supported by quarterly check-ins – can help you avoid key mistakes that people make:

  • Not understanding how their assets are allocated.
  • Not having a good sense of how their portfolios are meeting are tracking with their overall financial goals.  For example,  many people keep too much in cash, losing a margin to inflation every year.
  • Lacking clarity about how current market conditions are impacting their risk exposure.  At the start of the current downturn, conventional wisdom suggested that bonds were the way to go.  As of November 2009, long-term bonds are down 24% over the end of 2008.
  • A real understanding of how – and when – to buy low and sell high.

What's not part of the plan

For most of us, money is an emotional topic.  Much of our sense of security is wrapped up in what we think we have.  Many people hesitate to implement a portfolio review planning process out of concern for what they think might happen.  The two big ones are:

  • Loss of control.  The goal of the planning process is simply to look at what is possible and where opportunities might lie.  You still get to decide whether to act or not, regardless of what your advisors suggest.
  • Significant change.  The reality is that the outcome of most portfolio reviews is a tweaking or fine-tuning in the immediate term, along with a tightly-focused list of things to watch in the longer term.

We have had clients go through the review process, listen politely to the recommended adjustments and decide to do nothing.  We have also had a small number of clients make wholesale changes to their investment strategies – and realize significant gains.

There are benefits to be realized and absolutely nothing to be lost in going through the review process.

Timing and the current climate

Almost any time of year can be good for a portfolio review – and it’s good practice to schedule a review just like you schedule physicals with your doctor (you do, don’t you?).

Right now, things seem to be improving. rallied 35% between March 2009 and August 2009.  Those who have stuck to a program of periodic rebalancing have definitely benefitted.  As we write this, we are seeing potential opportunities in commodities, emerging markets and large capU.S.stocks and downsides in bonds and cash.

Of course, the market is a dynamic thing; it’s never static unless you are content to sit in muni bonds and collect the interest.  As things continue to improve the $5-$6 trillion sitting on the sidelines is going to come into the market and start chasing equities.   When that happens, it is going to drive values up.  It is also going to signal the end of the greatest opportunities in equities and the beginning of better opportunities elsewhere.

Whatever is happening, a program of formal portfolio reviews can help you take advantage of circumstances instead of letting them take advantage of you.

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