Finance - HL 293 (1)

Helpful miscellaneous articles regarding our retirement plan and planning.  Like you, I review my retirement nestegg and plan from time to time.  Recently, I went though some continued education for some credentials I maintain and it occurred to me that we all could use a review about these issues.  So with your help, we will share and post articles and info that may be helpful and of interest to many of you in this section.

 Conducting a Midyear Checkup? Avoid These 4 Mistakes

Christine Benz

11 Jun 2015

When it comes to checking up on your portfolio, a policy of benign neglect invariably beats too much monitoring. Investors who pay attention to their portfolios' daily values may find themselves berating themselves during the market's periodic downdrafts or congratulating themselves too much when their balances are fat. Worse, too-frequent portfolio monitoring can lead investors to tinker with their portfolios' positioning and holdings more than is desirable or necessary. They might be inclined to adjust their stock/bond/cash mixes based on short-term macroeconomic events, for example, or give a fund the heave-ho after just a short period of underperformance. Taking a long view is usually more helpful. For most investors, a quarterly, semiannual, or even annual portfolio checkup is plenty.

If a midyear portfolio review is on your to-do list, here are four additional mistakes--in addition to checking up too frequently--to avoid.

Mistake 1: Basking in the Glow of the Wealth Effect
If you have a sizable stock position and you haven't checked your portfolio's value for a while, it's a good bet that you'll be pleasantly surprised when you look at your balance. Even though stocks have encountered some turbulence in the past month--and interest-rate-sensitive bonds have performed even worse--the past several years have been tremendously placid for both stock and bond investors. But with enlarged portfolio balances comes the potential for behavioral errors. Accumulators may think they can pull back on their savings rates, while retirees may feel they can safely take higher payouts. In reality, however, higher market valuations mean they should be bumping up their savings rates and reducing spending. After all, future portfolio growth is apt to come more from investors' own contributions and less from market appreciation.

Smooth sailing for both stocks and bonds can also stoke investors' appetite for risk-taking with their portfolios; equity-market volatility, as measured by the CBOE Market Volatility Index, has been quite low. The S&P 500 hasn't had a losing quarter since the fourth quarter of 2012, and even then its loss was minor. Not only does that make it tempting to let winners run--and leave an ever-growing equity stake unchecked--but investors might also be inclined to build new positions in outperforming but higher-risk market sectors, thereby bumping up their portfolios' volatility potential at an inopportune time. On the short list of investment types to think twice about adding this late in the cycle are small- and mid-growth stocks (and funds), as well as biotechnology names. In the bond space, investors mulling additions to high-yield bonds should consider whether currently meager yields are adequate compensation for the risks of the sector.

Mistake 2: Underappreciating Defensive Players
In a similar vein, very strong returns from high-risk asset types tend to undermine the case for defensive portfolio constituents, whether stock or bond. It's easy to forget the market downdraft of 2008, when many such defensive players more than earned their keep. High-quality bonds, with their meager yields and low-single-digit five-year returns, are the ultimate "what have you done for me lately?" investment; it's easy to overlook their merits as shock absorbers in an equity-market sell-off. Many defensively minded equity funds--stalwarts like  Jensen Quality Growth (JENSX) and  AMG Yacktman (YACKX), for example--have also generally disappointed during the rally but would likely hold up well during a stock market shock. 

Mistake 3: Getting Lost in the Forest
Morningstar.com's Portfolio Manager is a terrific resource when checking up on a portfolio, but it's easy to get distracted or overwhelmed by all the data. You might get caught up comparing one holding's year-to-date return with that of another, for example, or spend an inordinate amount of time hunting for the reason why your cash weighting went from 4% to 7%. Things can get even more unwieldy if you have multiple portfolios saved on the site--one for your 401(k), one for your spouse's rollover IRA, and so forth. Before you know it, a few hours have gone by, and you've barely made any headway in your portfolio-review process.

To help avoid that trap, start your portfolio review by asking the basic question, "Am I on track?" If you have multiple portfolios saved on the site, the "Combine" feature (under the "Create" tab in Portfolio Manager) can help you collapse them into a single portfolio that you can use for ongoing monitoring. (If you do so, you can also retain your subportfolios to review separately.) Armed with information about your total balance and savings/withdrawal rate, you can then turn to a basic calculator such as Morningstar's Savings Calculator--or a more refined one such as T. Rowe Price's Retirement Income Calculator--to see whether your current portfolio's value gives you a good shot at reaching your financial goals. If you're off track on this front, portfolio tweaks might not move the needle; you may need to adjust your savings rate (or your withdrawal rate, if you're retired) to improve the viability of your plan.

When it comes to your portfolio, it's also valuable to think big picture. Morningstar's X-Ray tool provides you with many details on your portfolio's positioning, but the most important determinant of its performance will be your total portfolio's asset allocation, expressed as a pie chart in the top left-hand corner of the X-Ray view. Compare your current weightings with those of your targets; if you lack targets, use Morningstar's Lifetime Allocation Indexes or a good target-date series, such as the ones from Vanguard or T. Rowe Price, to check up on your portfolio's reasonableness. Also, take notes of any major unwanted sector or style bets.

Mistake 4: Not Focusing on Tax-Sheltered Accounts for Changes
If it turns out that you need to tweak your portfolio--and today, many investors are apt to find their portfolios heavy on stocks relative to their target allocations--be careful not to trigger any unwanted tax consequences along the way. That's particularly important these days, as many investors have substantial gains in their equity holdings; selling highly appreciated positions from their taxable accounts is apt to trigger a capital gains bill. That means that if you need to reduce the importance of a given asset class, sector, or investment style in your portfolio, you're better off doing so by trimming positions in your tax-deferred or Roth IRA accounts. There, you won't face any tax consequences as you reduce the value of your most winning holdings.

 (As with any of these informative articles, anyone who needs someone to talk to about

this very subject contact me and I can direct you to a knowledgeable advisor).

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