4 Steps to a Low Maintenance Investment Portfolio

These four steps can help you craft a (mostly) hands-off portfolio, writes Christine Benz.

Christine Benz 26 April, 2021 | 12:34PM
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Morningstar once conducted research that looked at what would happen if the holdings in fund portfolios were frozen in time, with no further changes over the following year. The surprising conclusion? They tended to beat the returns of the actual portfolios, which reflected the fund managers’ trading activity. In other words, the funds would have performed better had the managers stood pat rather than trading.

Investors should take that finding to heart when they manage their own portfolios, too. While some investors swear by frequent monitoring and rebalancing tweaks, I’ll happily take a policy of benign neglect any old day.

There are many good reasons to be hands-off. Firstly, assuming you’ve taken care from the start and selected high-quality investments, then too frequent monkeying around could lead to worse results than sitting still. Trading can also jack up costs, both transaction and tax costs, which drag on returns.

Being hands-off is also less stressful. If you limit your check-ups to a simple annual review, you’re less likely to sweat small market movements. And, finally, there may be periods in your life when you’re unwilling or unable to spend much time on your portfolio. Crafting an ultra-low-maintenance portfolio helps ensure that nothing catastrophic would happen if you couldn’t check in with your portfolio for a year or even longer.

Of course, the gold standard for taking a hands-off approach is to delegate to a financial adviser. But if you’re a do-it-yourself investor aiming to build a “no babysitter required” portfolio, here are the key steps to take:

Step 1: Find your Portfolio’s True North

The starting point for creating a low-maintenance portfolio is your asset allocation, which will have by far the biggest impact on how your portfolio behaves.

But the tricky part about asset allocation is that, for many situations, the "right" mix is a moving target. A large equity weighting typically makes sense for the pre-retirement years, but you’ll probably want to transition to holding more cash and bonds as retirement approaches.

Target-date funds elegantly address this issue by shifting your portfolio as the years go by (this is likely what you've been defaulted into in your company pension scheme). If you’re okay with an asset allocation that’s not necessarily customised to your particular situation, this is a good option.

If you want more control over your asset allocation, it’s important to think through your risk capacity and risk tolerance. Risk capacity relates to how much risk you can afford to take, whereas risk tolerance refers to how much volatility you can psychologically and emotionally tolerate. This article discusses how to tailor your mix of aggressive and conservative investments to your own situation: the type of job you have, for example, as well as your savings rate, and this article looks at how to customise if you're retired, using the “bucket” portfolio concept.

In addition to thinking through your starting asset allocation, consider how it might change over time. You might target a 70% equity/30% bond portfolio until age 55 but then step down your equity exposure, for example. 

Step 2: Eliminate Redundant Accounts

If your aim is to reduce complexity and oversight in your portfolio, one of the best things you can do is to skinny down your number of accounts. These days it's likely you'll have half a dozen different employers over the course of your working life so it's easy to lose track of old pensions. Consolidating these not only makes it easier to keep on top of where your money is invested, but can also be more cost-effective. Do take advice if you're transferring money out of an old defined benefit pension scheme though as these often have lucrative benefits attached that you don't want to lose. 

Also worth considering are old savings accounts or Isas, and the same goes for your spouse or any children's savings accounts. That's not to say every member of the family should have all their wealth in a single pot - but that it's worth having a financial audit of the whole family if you're doing it for yourself. Children with old Child Trust Funds for example, may be better to have their savings transferred to a Junior Isa. And if you've maxed out your own annual Isa allowance, it may be worth considering funnelling any extra savings into your spouse's accounts to take advantage of tax breaks. 

Step 3: Identify Low-Cost, Diversified Building Blocks

Once you’ve determined your portfolio’s asset allocation and reduced your number of accounts to a bare minimum, you can turn your attention to identifying the simplest possible building blocks to populate the portfolio(s). 

For your long-term investments, broad “total market” index funds and exchange-traded funds (ETFs) are by far the lowest-maintenance choices; their portfolios are guaranteed to track a given market segment, less costs, and provide all (or almost all) of the exposure you need to a given asset class. Fidelity, iShares and Vanguard all offer ultra-low-cost broad-market index trackers for major equity and bond markets. 

Step 4: Document your Maintenance Regimen

Think of your no-babysitter investment portfolio as a grown child: Just because you don’t have to attend to its basic needs every day, doesn't mean you won't want to check in periodically to make sure everything’s okay. 

If you’ve followed the steps above, a review once a year should be enough to keep things running smoothly. (You'll probably want to attend to your adult kids more than that!) Such an annual check-in will be essential if you're already retired because you'll need to figure out how to extract cash for living expenses from your portfolio.

To help facilitate the process and ensure you don’t overdo your checkups, I like the idea of using an investment policy statement with the basic outlines of your portfolio (your approach to asset allocation and security selection, for example), as well as how often you’ll check up on your portfolio and how you’ll do it. This article walks your through how to craft one.

If you’re retired, maintaining your portfolio will be a bit more complicated: Not only will you need to determine where you’ll go for cash to meet your living expenses, but you’ll also have to ensure that your portfolio withdrawals aren’t so rich that you risk early depletion of your portfolio. A retirement policy statement can help ensure that you’re thinking through and documenting all of these issues.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
General Electric Co75.25 USD-0.65Rating

About Author

Christine Benz

Christine Benz  is director of personal finance at Morningstar and author of 30-Minute Money Solutions: A Step-by-Step Guide to Managing Your Finances.