Many of the basic rules of investing are counterintuitive. For example, rising interest rates may be good news for those shopping for short-term savings vehicles, but they're generally bad for bond funds. And here's another zinger: The lazy investor is often more successful than the hard-working one.
If you're checking in on your portfolio holdings every day--or worse yet, throughout the day--you may be tempted to trade more than you need to. In turn, you may run up high tax and transaction costs, and you're also more likely to chase hot-performing stocks and funds in the hope that they'll continue to outperform. That can be a recipe for disaster.
Because it is possible to shoot yourself in the foot with overzealous trading, I'm a big proponent of conducting a portfolio review just a few times a year--semiannually or quarterly. The purpose of this portfolio check-up is to systematically troubleshoot problem spots and identify changes you may want to make as part of your rebalancing programme. (You should plan to rebalance your portfolio--remove money from those investments that have performed well and plough it into your portfolio's underachievers--at least every few years.)
Observe the following five steps as you conduct a review of your portfolio. Take notes as you go along, because you'll want to refer to them when you rebalance. (Read Rebalancing Made Simple forfurther tips for rebalancing.)
1. Make Sure Your Asset Mix is in Line with Your Targets
One of the most important determinants of whether your portfolio is positioned to meet your goals is your asset allocation--how much you hold in equities, bonds, and cash. To help get a precise read on how your portfolio is currently positioned, check out Morningstar's X-Ray tool--if you're not a Premium member you can get access to the tool instantly when you take a 14-day free trial. Enter a ticker for each of your holdings (don't forget company shares and cash!), along with the sterling value for that holding, then click Show Instant X-Ray. You'll see an instant breakdown of how much you have in each of the major asset classes, which you can then compare with your target allocations. Many fund managers have been exiting eurozone stocks in the past few years, so your portfolio's European equity holdings may have decreased. That's not a bad thing, but it could signal that you need to add more dedicated eurozone-equity exposure to your portfolio if you want to be well diversified (and potentially placed to benefit from a rebound in the region).
2. X-Ray Your Portfolio
Once you've assessed your portfolio's asset allocation, turn your attention to how your equity and bond holdings are positioned. Within Instant X-Ray, you can see equity and bond Morningstar Style Boxes (two nine-square grids in the upper right-hand corner of the X-Ray page) that depict the investment styles of your holdings. While you shouldn't expect to see an even distribution of holdings in each of the nine squares, you do want to take note if the majority of your holdings are huddled in one or two regions of the style box.
Instant X-Ray also shows you how your equity holdings are dispersed across various market sectors, as well as how that positioning compares with your chosen benchmark index's sector weightings. As with style-box positioning, you shouldn't get too worked up about some divergences, but you do want to take note of very big bets--sectors where your weighting is more than twice that of the index, for example.
Finally, take note of whether your portfolio is disproportionately skewed towards one or two individual share holdings. If your company offers a share purchase programme you may discover your employer's stock is hogging a disproportionate share of your portfolio, in which case it could be time for some tweaking. (As a general rule of thumb, company stock should take up less than 10% of your total holdings.)
3. Review Your Individual Holdings
Once you've checked out your aggregate portfolio's positioning, it's time to conduct a quick check-up on each of your individual holdings. Use the Search function at the top of all Morningstar web pages to find detailed reports for each fund or equity, from where you can access our analysts' research report on those holdings under their coverage. You can also view our latest research reports here. Morningstar's analyst reports are a quick and easy way to get a handle on the key issues at most prominent funds and publicly traded companies. Search the online article archive for specific commentary on companies, funds and investing themes.
If you'd like to conduct your own research on your holdings, you'll need to drill down into the data. For funds, take note of any manager changes, strategy alterations, or upheaval at the fund-company level. (A lot of fund shops have changed hands over the past few years.) As you assess individual stocks, take note of price multiples and profitability trends.
4. Examine Performance
It's a big mistake to focus too much attention on short-term performance, but your quarterly or semiannual portfolio review should include a quick assessment of which of your holdings are providing the biggest boost to or drag on your portfolio's overall return. It's fine to glance at year-to-date performance, but focus most of your attention on the longer-term numbers--each holding's return over the past three and five years relative to that of other offerings within that same category. Also take note of absolute returns. Which of your holdings have contributed the most--or detracted the most--from your portfolio's bottom line? Sustained underperformance can be an indication that something's seriously amiss with one of your holdings. But assuming that your rationale for buying an equity or fund is still intact, a spate of weak returns can also provide you the opportunity to add to that holding on the cheap when you rebalance later this year.
5. Plan Your Next Move
After you've reviewed your portfolio's current status, it's time to plan your next move. It's not likely that you'll uncover a portfolio problem you need to address right away, but you should make sure to schedule a time to rebalance your portfolio. Conventional financial-planning wisdom holds that the best time to rebalance is at year-end, with an eye toward harvesting any losses to offset capital gains elsewhere in your portfolio. But if you'll have more time to focus at some other time of the year--say, earlier in the fourth quarter--by all means do so.
A version of this article was originally published in December 2009.
