Knowing if your portfolio of assets is working toward your financial goals takes some time, skill and effort. Let's look at how to build and monitor an asset portfolio.
Take an inventory of your assets
Gaining an accurate view of your assets is the beginning step. Build a list of securities and include their values. Assign each security to an asset class grouping of equity, fixed Income or cash. Determine the weight, as a percentage of total asset value, for each security and each asset class. Be sure to include retirement assets, CDs, and the cash value of insurance products. This isn’t a net worth statement so leave out other assets like boats, cars and primary residence.
Step back and understand why you own each investment. The goal is to own assets that are playing a role in achieving your goals.
Avoid outsized positions
Balanced, diversified exposures can generate smoother returns and less violent swings in portfolio value. If you own ETFs or mutual funds, look through to the underlying securities. Generally, these investments are diversified and own a high number of securities. Set limits for exposure to an investment style in your portfolio, i.e. large cap versus small cap, growth versus value, income versus growth. Another way to manage risk is by setting hard limits on position size. If a fund you own grows to greater than 10% of your overall portfolio, for example, be disciplined and take some profits.
Owning too much of an employer stock is common. ERISA safeguards protect against owning too much in a 401k or a company contributing stock to a pension. However, no safeguards are in place to protect you from bonus awards or exercising stock options without selling. Many employees need help letting go of their employers stock. Set in place a discipline for selling and reinvestment of the proceeds.
Be wary of salespeople selling you too much of one thing. They get your buy-in to the benefits of the investment and then try to sell you an oversized allocation. We see this often in annuities and private placements. Step back and determine how that security fits into your overall portfolio.
Implement a rightsized portfolio and monitor it
An asset portfolio should be based on your risk tolerance, goals and emotional ability to tolerate market turbulence. Dynamic long and short-term goals, tax mitigation and retirement planning complicate investing. Carefully set goals and determine what portfolio mix and securities best solve your problems.
Implement a portfolio using best-in-class active or passive management of securities that encompass a diversified style exposure. Before buying, research each security and know how it fits into your portfolio.
Regularly monitor and evaluate the securities in your portfolio and to make sure they are in step with your goals. Not all securities achieve their targets, so have a process in place to monitor performance and style drift. Even professionals can get caught up in emotional decisions, so have a process to fall back on.
Knowing what you own sounds like a sensible idea. In the process of setting goals and building a portfolio, an Investment Policy Statement can serve as the governing document. Professionals can help build a monitoring tool and the right partner can help make it a good experience.
Go get your accounting visor, roll up your sleeves and get your assets working to solve your problems.
John Kirby is a Principal and Co-Founder of Laurentide Advisory.