How to review your investment portfolio allocation

I see too many people neglect their investment portfolios for too long.  The investment industry has preached the merits of buy and hold for a long time but people must know that buy and hold does not mean ignore.

Sometime people go to great lengths to set up an investment plan either with the help of an advisor or doing it on their own.  The problem is many of these plans are put on autopilot with little to no management.  A portfolio needs to be managed and reviewed from time to time.  As the old saying goes, “Take care of your money and it will in turn take care of you.”

When was the last time you reviewed your portfolio?

Do you review your investment portfolio regularly?

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Let’s walk you through a process of reviewing your portfolio using the example of Peter who started with $96,000 and now that the portfolio has dropped 14%, he came to me as an independent source to get help reviewing his portfolio.

Reviewing your portfolio allocation or diversification

Probably the most important aspect of a portfolio is the diversification. Contrary to popular belief, diversification is not the number of different investments that you own.  For example, Peter owns 5 Canadian equity funds in his portfolio but when the TSX goes down, they all go down.  A better form of diversification would be to own 5 different investments that do different things at different times.

Efficient diversification means every part of a portfolio has a function and the goal should be to have an efficient mix of investments.  In the investment industry, we call this Asset Allocation.

Intentional mix vs. accidental mix

The key to portfolio diversification is to have an intentional mix as opposed to an accidental mix.  Everyone has a mix of investments.  The question is whether that mix is intentional or accidental.  For too many people their mix is accidental as it comes from the “Wing it strategy.”  They buy a little of this.  Next year, they buy a little of that.  Before you know it, you have a portfolio with many different investments but there was no intentional game plan to begin with.

What’s your current allocation?

We took a look at Peter’s portfolio and categorize the investments into 5 basic asset classes:  Cash, Bonds, Canadian Equities, US Equities and Global Equities and determine how much of your portfolio is allocated in each of these categories from both a dollar perspective and a percentage perspective.  Here’s what his portfolio looks like:

Current ($)

Current (%)

Cash

$5,700.00

6.88%

Bonds

$21,000.00

25.33%

Canadian Equity

$33,200.00

40.05%

US Equity

$6,300.00

7.60%

Global Equity

$16,700.00

20.14%

$82,900.00

100.00%

What is your target model allocation?

The investment industry is highly regulated and one of the biggest concerns for from the regulators is something called “SUITABILITY”.  In other words, is your portfolio suitable for your needs?  That’s precisely why every financial advisor and financial institution has you complete a risk profile questionnaire.  These questionnaires are designed to assess your risk tolerance, time horizon, financial objectives, etc.  Here’s one example of these questionnaires.

Download sample risk profile questionnaire (702 downloads) – This is a sample risk profile questionnaire from Sun Life but every financial institution has a similar type of questionnaire.

Peter completed the questionnaire, and his answers suggest that he should hold a balanced portfolio.

Target (%)

Cash

5.0%

Bonds

35.0%

Canadian Equity

35.0%

US Equity

10.0%

Global Equity

15.0%

100.00%

Does your current portfolio match your target allocation?

Take a look at your existing portfolio and see if it matches your target allocation.  Here’s an example of a spreadsheet to compare your current allocation to your target allocation.

Current ($)

Current (%)

 

Target ($)

Target (%)

 

Action

Cash

$5,700.00

6.88%

$4,145.00

5.0%

-$1,555.00

Bonds

$21,000.00

25.33%

$29,015.00

35.0%

$8,015.00

Canadian Equity

$33,200.00

40.05%

$29,015.00

35.0%

-$4,185.00

US Equity

$6,300.00

7.60%

$8,290.00

10.0%

$1,990.00

Global Equity

$16,700.00

20.14%

$12,435.00

15.0%

-$4,265.00

$82,900.00

100.00%

$82,900.00

100.00%

In this example, you would sell some cash, Canadian equities and global equities.  With that money, we would buy more Bonds and US stocks.

  Download Portfolio Manager Spreadsheet (436 downloads)

 

A word of caution

Sometimes reviewing the portfolio with this approach, investor psychology can play a big role in developing the target allocation.  One of the challenges of using risk profile questionnaires like this is that your responses are largely influenced by emotion and your emotions can often change and lead you to the wrong behavior.

Often people want to review their portfolios when markets are down as opposed to when they are up.  When portfolios are making money, people tend to want to leave this alone because they are working great.

If you review your portfolio when the markets are down, there is a chance your gut is telling you to reduce the amount of risk, which means reduce the amount of equity exposure and potentially sell out some of your stocks.  If you think about it, that may go against the logical approach of buy low, sell high.

This is a very basic approach to reviewing your portfolio allocation.  Although sometimes there is something to be said about keeping it simple, there are many ways to review your portfolio allocation.  Care to share how you do it?

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites JimYih.com and Clearpoint Benefit Solutions.

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