Just as regular maintenance and attention keeps your health on track, so too will it keep the health of your investment portfolio on track. Many investors put great effort into building an appropriate portfolio initially, but put off the necessary regular maintenance.
The danger is that your investments become over-weighted in stocks or sectors that have done well, throwing off the balance, while attractive opportunities pass you by. It doesn’t take much, but following some key steps in monitoring your portfolio has proven to be an easy way to maintain your financial health.
If you haven’t had a portfolio check up recently, setting aside an hour or two to go over your investments yourself or with your financial advisor will be time well spent.
Where to start?
First, take a moment to review your current situation and make note of whether anything has changed since you created your portfolio. Second, reconfirm your long-term financial goals and take the step of writing them down.
Third, close the gaps between your current portfolio asset mix and the target mix that fits with your current situation and long-term goals.
Then evaluate ways in which you can improve the diversification of your portfolio and finally, identify risks you’re exposed to and opportunities you believe are worth the risks.
Match Objectives to Asset Mix
The most important element of a healthy portfolio is that the mix of investments is right. Your objectives, whether you’re looking for growth, preservation, or regular income, determine the right mix, or asset allocation.
Our recommendation is that most investors own some of each major asset class including bonds, Canadian and US stocks, international investments, and cash. The historic performance and volatility of the above asset classes are different and need to be directly linked to your objectives and risk tolerance to make sure you have the right mix.
Your portfolio health check will include an evaluation of whether you need to rebalance the above asset mix. A diversified portfolio will have asset classes that do better than others in any given year. Rebalancing means selling shares of the investments that have done well and buying shares of the investments that have performed poorly.
Rebalancing can add value because you’re increasing your allocation to investments that have performed poorly and are potentially poised to perform better in the future.
More importantly, rebalancing is how you make sure you stay on track to achieve your long-term goals.
A portfolio check-in involves additional review to make sure you have sufficient diversification. One easy way to diversify is to allocate a component of your portfolio to investments that are themselves baskets of investments. Exchange Traded Funds are an efficient way to achieve great diversification.
Maintaining appropriate diversification when you own individual stocks and bonds requires attention to many factors. For example, you could set an arbitrary limit that no more than 5% of your money can be in any one stock.
You’ll want to make sure you own stocks and bonds from a variety of sectors in the economy and also want to ensure your investments represent several countries and geographic regions. Laddering your bonds by the date on which they mature is an easy way to diversify your fixed income.
Your money needs attention. A proven benefit of taking the time to do a portfolio check up is that you’ll be more likely to identify problems early and take steps to make sure your objectives and your investment approach are aligned.
Investments have become more complicated, information is available in overwhelming quantities, and we’re bombarded with new investment products and theories. It doesn’t have to be complicated. Following a few simple and realistic steps will keep you on track to meet your goals.
We’d love to help you with your portfolio health check. Please consider contacting us to start a conversation. You could begin by learning more about how we work here: http://www.hayashiholden.ca/how-we-work/
Heather Holden, PhD, CIM
Wealth Advisor, ScotiaMcLeod