Mid-year Portfolio checklist

We are at the halfway point for the year and market volatility is back with us. With the down day on Friday June 22nd the Dow has now had 68 days of greater than 1% moves. To put that in context in 2017 there were 12, which was the fewest in history. So, what do long-term investors need to do in this type environment to protect their hard earned assets. Here is a 4 point checklist for investment portfolios.

Know your risk profile

One of the absolutes in investing is that you cannot time the market and you have to stick in when times get tough. We have had an incredibly long bull market which may end today, next week, or in several years. No one really knows but if you are investing you need to be prepared for a draw down. That is where your risk profile comes into play in that it is an assessment of how much risk you could handle in a portfolio so that you could ride out a market downturn. Most financial planners have some type of risk assessment questionnaire that they use to determine a risk score that is then matched to a portfolio allocation. We use one that we feel is more dynamic than most (you can see a sample here) and gives us a better understanding of a client’s risk profile. There are many ways to get there including some free online tools and it is critically important to go through the exercise.

Set your asset Allocation

Once you know your risk profile you can determine your asset allocation. In a broad sense this is how your investment funds are split between different categories of stocks, bonds and cash with more money in stocks being a riskier portfolio. It could look something like this:

Asset allocation target.jpeg

You never know which asset class will outperform from year to year. By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur and potentially dampen the impact of down markets. Having an asset allocation plan is a very important step in the investing process and not having one is a mistake that I see quite often with investors. If you have not set your asset allocation now is a good time to do it and codify it by putting it in a document.

Have a rebalance strategy

If you have set your asset allocation then the next step (may) be to rebalance. Say you have the above asset allocation strategy of 60% stocks, 36% bonds and 4% cash. Due to market price changes you may find that your portfolio is now 66% stocks, 30% bonds and 4% cash. To get back to the correct percentages you may want to sell some of your stocks and buy some more bonds, or you could rebalance using cash flow. We have a detailed discussion on rebalancing that can be found here. For our clients we take into consideration factors such as tax liability, drift from target, trading costs and planned future cash flows. It is typical to have to rebalance on an annual or 18 month basis. The time frame is not as important as having some type of rebalancing strategy.

Manage expenses

The fees that investors have to pay to a manager to invest their money have fallen dramatically over the last decade. One study showed that 401k participants have seen a 42% decline in expense ratios since 2000. Even with the decline in fees I see portfolios all the time paying 4 to 5 times or more what they should be paying. So, what is a reasonable fee? It depends on your situation but I would say a ceiling could be ½ of 1%, or 0.50%. You can find this information online, in the fund or etf prospectus or through a database like Morningstar. If you have an investment with a fee greater than that look for alternatives. This can sometimes be challenging in a 401k with limited investment choices, but it is still worth the search. The reason you do this is simple math: the fees you pay reduce your return which reduces you nest egg. Don’t pay more than you have to.

I hope this gives you a good checklist for your mid-year portfolio review.

When I sat down to write this I did not think it would be this long (or take this long to write) but there is nuance in everything we do. If you have questions or would like help with any of this, let’s talk.

Bill Nickles