Time for an Annual Portfolio Review!

For many investors, the thought of reviewing the performance of their portfolio over the past year is about as appealing as walking through seaweed; to swim you have to traverse the muck.  Chestnut Investment Advisory offers a better way to enjoy the scene.

It is vital for your overall financial health to periodically review your portfolio, either on your own or with your trusted advisor (whose review should cover many aspects of your personal finances, not just your investments).  Besides, it may prove to be not as mucky as you fear, especially if you focus your mind on future possibilities.

Review your portfolio in the context of your overall finances.  A portfolio is only one aspect of regarding your money and investments.  You should not seek to beat the market, but to achieve your personal financial goals which requires different investment strategies.  Consequently, if you make financial adjustments, do so because either your goals or financial circumstances have changed, not because the market is muddy or clear.

Your portfolio is an index.  The common indexes can be all over the place.  But that doesn’t necessarily mean your portfolio is down by the same numbers.  You probably have investments that do not reflect these indexes.  Many portfolios include bonds, which can provide strong positive returns in rough times and cash equivalents, which can also provide positive returns and stability.  Some investors hold real estate, which also has had strong positive returns.  So, if you’ve only invested in large cap and high tech stocks, you undoubtedly have winners or offset the losers.

Diversification still works.  By its very design, a properly diversified portfolio will have winners and losers.  That’s because the performance of a particular type of asset typically doesn’t correlate with the performance of other assets for any given market and economic condition. 

Be consistent in how you use benchmarks.  Investors often inappropriately judge their entire portfolio against a single-asset-category benchmark.  Furthermore, they complain when their portfolio underperformed the market during the boom years, they remain dissatisfied in the down market even though their portfolio had not lost as much as the market.  Yet one objective of a well-diversified portfolio is to smooth the ups and downs like a sandy beach.

Focus on the donut, not just the hole.  Part of the anxiety many investors experience stems from focusing on the down numbers they see in their individual monthly brokerage or mutual fund statements.  Again, don’t focus on the parts; focus on the entire portfolio during your annual review; and on rolling three or five year returns.  Stay focused on the long term.

Rebalance if necessary.  In the portfolio performance review observe whether you need to rebalance your assets so they match your intended asset allocation.  Say for the last several years you’ve used an asset allocation of 65% stocks, 25% bonds and 10% cash, and that for your long term goals and risk tolerance that allocation is still appropriate.  Yet in the current market, stocks may make up significantly less than 65% and bonds considerably more.  You’ll want to bring those allocations back in line either by selling some bonds and buying stocks, or purchasing only stocks with fresh dollars you invest.

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