Time for your annual portfolio check-up!

Most people can't resist checking on the value of their investment portfolio when times are sunny and when times are bleak. Both times set an unrealistic long term view. Portfolios don't always keep going up and they don't always keep going down. Emotion can cloud the minds of the seasoned investor.

Being a disciplined investor is not easy but over time it has shown the ability to generate wealth while attempts to time the market have proven costly for many investors.

You can't just "set it" and "forget it." This is a common mistake that investors make. Another common mistake is changing one's holdings too frequently by chasing the hottest-performing security or asset class.

Your portfolio needs an annual physical, just like you do. The "check-up" will keep you in step with your asset allocation and would also be a good time to think about rebalancing. Setting and maintaining your strategic asset allocation is the most important ingredient in determining long-term investment success.

The goal of diversification is not to enhance performance. However, once you have chosen a target level of risk you are willing to assume based on your goals, time line and volatility tolerance, diversification will provide the potential to improve returns for the level of risk taken.

To start the "physical exam" you need to make sure that your investment mix (asset allocation) is aligned with your financial needs, investment time frame and comfortability with volatility. Typically asset allocation will not change on a year-to-year basis unless you have experienced a major life event such as divorce or losing your job.

Changes should be gradual as your life changes. The present low-rate environment may have caused you to take on more risk than you are willing to assume in reaching for return. Generally the longer your time horizon for investment the greater the percentage of stocks that should be in your portfolio.

Time is on your side since you will have the ability to ride through a number of market cycles. Over longer periods of time, stocks outperform bonds. If you time horizon is shorter, then you should have more of your assets in bonds.

The "physical exam" should look at the possible volatility of your portfolio. Are you able to withstand the possible volatility or do you need to add volatility to reach your investment goals? Is your asset allocation still allowing you to meet your goals? Do you have more funds in one asset class than you originally wanted to have?

Remember as the stock market goes up your allocation to stocks increases and bonds decreases. As the bond market goes up your allocation to bonds has increased and stocks decreased. Either way it is not the original game plan.

What should be prescribed after the physical exam? A potent dose of rebalancing is the answer! The next question you need to ask yourself is: How are you going to accomplish this?

There are a couple of different ways you can rebalance your portfolio. If you are adding money in a steady stream or all at once, you can simply add any additional funds to the asset class that is underweighted. This is easy to do in the case of retirement accounts as you should be contributing the maximum you possible can every year.

Should it occur in a non-retirement account you can simply sell part of the over-weighted asset class and buy the under-weighted. If you have money in a savings account, you can add it to your investment account and re-balance your asset allocation to fit your risk tolerance.

A potent dose of rebalancing is necessary to make sure that your investment goals are met and you're are not taking on more risk than you deem acceptable. If you are working with an investment professional, they should be suggesting this to you and assisting in the process.


Sharon L. Thornton is senior director of investments for Karpus Investment Management, an independent, registered investment advisor that manages assets for individuals, corporations and trustees. Offices are located at 183 Sully's Trail, Pittsford, N.Y. 14534; phone (585) 586-4680.

Published: Fri, Nov 20, 2015