Time for a Portfolio Health Check?
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 over time have become over-weighted in stocks or sectors that may be throwing off your desired risk level, while other 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 financial health.
If you haven’t had a portfolio check up recently, setting aside an hour or two to review matters with a professional financial advisor will be time well spent.
First Steps
First, take a moment to review your current situation and make note of whether anything has changed since you first created your portfolio. Have you recently retired? Have your income needs changed?
Second, reconfirm your long-term financial goals and whether the current risk level to accomplish these goals is appropriate.
Third, determine if your investments are tax efficient. There are ways to structure investments to be highly tax efficient without taking on additional risks.
Fourth, determine what fees are associated with your portfolio. How is your advisor being compensated? Are there hidden management fees? Are you paying per transaction or via a transparent annual fee? No one works for free so it’s important to fully understand how your financial advisor is earning their income.
Once you’ve determined what you’re current situation is it might be time to evaluate ways in which you can improve your portfolio.
Match Objectives to Asset Mix
The most important element of a healthy portfolio is that the mix of investments is correct. Your objectives, whether you’re looking for growth, preservation, or regular income, are key when determining the right mix, or what is also known as asset allocation.
Generally, 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 investments vary and need to be managed to your objectives and risk tolerance to ensure you always have the right mix.
Rebalance
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 can mean selling shares of the investments that have done well, thereby realizing the profits made, and buying shares of investments that have more future potential to them.
Rebalancing can add value because it ensures that you own the right type of investments based on market conditions, risk tolerances, and income needs.
More importantly, rebalancing is how you make sure you stay on track to achieve your long-term goals.
Diversify
A portfolio health check involves making sure you own the right type of investments both in good and bad times. In general, bonds are safe and consistent investments; however don’t often provide significant gain potential. On the other hand, stocks do provide growth potential, but do carry a higher risk profile. Managing this risk and return relationship is what an accredited professional financial advisor is trained to do.
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.
The Benefits
Your money needs attention. A proven benefit of taking the time for a portfolio health check 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’re here to help you with your portfolio health check. Please consider contacting us to start a conversation.