I recently had a terrific experience at my doctor’s office. After my annual physical, the receptionist said, “There’s no charge for today’s visit. Your insurance covered 100% of the cost.” While my insurance is reasonably good, there are usually payments involved for most things. As I pondered why it would fully cover this bill—a preventive exam—I realized that the insurance company is happy to invest in monitoring my health, because ultimately it helps their bottom line.
The same goes for your financial health. It’s important to assess your goals—both the amount of return you need and the risk you can tolerate. But once that exercise is completed, investing should not be a “set it and forget it” exercise. Planning for life’s events can often have us looking far into the future, but markets can change quickly, so it’s important to regularly check in with your own plan. In other words, while it’s important to keep your eye on the horizon, it’s also critical to properly navigate the journey getting there.
Has anything changed?
This is the first question my doctor asks me at every annual physical. Being relatively healthy, I know he’s looking for early signs that my condition may be headed in the wrong direction. While I’m never happy when he points out that I’ve gained weight since last year, I know that this process is critical to my overall health. What I want to hear does not always align with what I need to hear.
Performing a similar exercise on your portfolio is also critical. Reviewing your portfolio when markets are up can be quite fun, while conducting that same review while markets are falling might be painful.
Here are a few questions to ask at least once a year about your portfolio:
- Have your objectives changed? Is there something new you are now planning for? Has your time horizon changed? If so, you’ll likely need to adjust your portfolio.
- How have your views of the market changed? Different investments come in and out of favor, and your portfolio should reflect that. However, this is not an invitation to bet everything on a hot investment, let a winner run for too long without trimming it, or go to cash if you’re scared. A proper asset allocation will give you the best chances for the success of your long-term plan, so unless your time horizon or required return have changed dramatically, you are best off tweaking around the edges, provided the portfolio was properly constructed.
- Is anything you own not working? Monitoring your holdings must always be done with perspective. Some investments should provide growth. Since not everything is meant to increase in price at the same time, some laggards may have justification. However, if none can be found, then it could be time to remove it. Conversely, some investments should help reduce risk. Our expectations for these holdings should be different, but no less important.
What if something happens?
Portfolios should evolve as circumstances change. Through disciplined monitoring and measuring of a portfolio against its benchmark, mismatches can be identified and remedied. In particular, regular portfolio stress-testing can help us learn a lot. Just like my doctor would ask me to run on a treadmill to test for any abnormal reaction in my heart rate, stress testing a portfolio can reveal scenarios that might elicit a dramatic response, helping us prepare for a variety of market events.
Stress testing can also help keep you from making inappropriate moves as market volatility changes. When markets are volatile, investors tend to grow more risk averse. The opposite is also true—when markets are calm, investors tend to take on more risk. In other words, if managing against a large drawdown is the key to keeping you invested at stressful moments, building the portfolio with an intentional awareness of how it would behave should we have a recession (as an example) may be the key to keeping the portfolio invested, and your investment plan on track.
More than just a step, monitoring permeates the entire portfolio construction process. It gives you the ability to evaluate results during the journey, ask questions about the portfolio’s recent behavior within context of the markets’ recent returns, and ensure the portfolio’s alignment with the return target you established at the outset.
The process of constructing a portfolio is more complex than ever. Investors need the right tools, technology, resources, products and, most importantly, insights to achieve their investment goals. The portfolio construction process can be time consuming and confusing. In the same way I look to my doctor to help keep me healthy, working with a financial professional can also bring objectivity and expertise to the process, which our research shows can help investors feel more confident and better prepared for their financial future.
While it’s natural to focus on the horizon—your long-term goals—it’s always important to remember that the journey is never a straight line. Regularly monitoring your financial health is essential to your success.