Monitoring Your Portfolio

You might already know that you need to watch your investment portfolio, and update it now and then. Maybe you made sure to put certain slices of your assets into different kinds of investments. Even so, the forces of the market can tweak things quickly. One kind of investment might end up with a bigger piece of the pie than you might have originally planned for. For example, if stock prices go up, then stocks might end up as a bigger percentage of your portfolio than you want. If stock prices go down, you might worry that you won't meet your financial goals. The same is true with bonds and other investments.

Do you have a plan for dealing with those changes? You'll probably want to take a look at your individual investments, but you'll also want to think about your asset allocation. Your game plan for periodically refining your portfolio should reflect your investing personality.

The simplest choice is to set it and forget it--to make no changes and let whatever happens happen. If you've allocated wisely and chosen good investments, you could sit back and do nothing. You might think, "if it's not broken don't fix it." But even if you're happy with your returns, remember that your circumstances will change over time. Those changes, especially unexpected ones, may affect how well your investments match your goals. At a minimum, you should periodically review the reasons for your initial choices to make sure they still make sense for you.

Even things out

To bring your asset allocations back to the original percentages you set for each type of investment, you'll need to do something that may feel counterintuitive: sell some of what's working well and use that money to buy investments in other sectors that now represent less of your portfolio. Typically, you'd buy enough to bring your percentage back into alignment. This keeps what's called a "constant weighting" of the types of investments.

Let's look at a hypothetical illustration. Say there was a portfolio that originally included 50% in stocks. If stocks rise, the portfolio might now have 70% in stocks. Rebalancing that portfolio would involve selling some of that stock, and then using the proceeds to buy other investments. The point of this is just to bring the percentage of stock in the portfolio back to 50%. The same would be true if socks dropped and now represent less of the portfolio than they should. To rebalance, you would invest until they represent the right amount of the portfolio again. This example doesn't represent actual returns; it just shows how rebalancing works. Maintaining those relative percentages reminds you to take profits when a given kind of investment is doing well. It also keeps your portfolio in line with your original risk tolerance.

When should you do this? One common rule of thumb is to rebalance your portfolio whenever one type of investment gets more than a certain percentage out of line — say, 5 to 10%. You could also set a regular date. For example, many people prefer tax time or the end of the year. To stick to this strategy, you'll need to be comfortable with the fact that investing is cyclical. All investments generally go up and down in value from time to time.

Forecast the future

You could adjust your mix of investments to focus on what you think will do well in the future, or to cut back on what isn't working. Unless you have a perfect crystal ball, this is a trickier strategy than constant weighting. Even if you know when to cut back on one type of investment, or get out entirely, are you sure you'll know when to go back in?

Mix it up

You could also attempt some combination of strategies. For example, you could keep your current strategy with part of your portfolio. With another part, you could try to take advantage of short-term opportunities. Or you can use that part to test areas that you and your financial professional think might benefit from a more active investing approach.

Another possibility is to set the bottom line for your portfolio: a minimum dollar amount below which it cannot fall. If you want to explore actively managed or aggressive investments, you can do so--as long as your overall portfolio stays above your bottom line. If the portfolio's value begins to drop toward that figure, you would switch to very conservative investments that protect that baseline amount. If you want to try unfamiliar kinds of investments and you've got a financial cushion, this strategy lets you try new assets while helping to protect your core portfolio.

Points to consider

• Keep an eye on how different types of assets react to market conditions. Part of fine-tuning your game plan might involve putting part of your money into kinds of investments that behave very differently than the ones you have now. Diversification can have two benefits. Owning investments that go up when other go down might help to either lower the overall risk of your portfolio or improve your chances of achieving the rate of return you want. Asset allocation and diversification don't guarantee a profit or insure against a possible loss, of course. But you might benefit from seeing whether there are specialized investments that might help balance out the ones you have.
• Be disciplined about sticking to whatever strategy you choose for monitoring your portfolio. If your game plan is to rebalance whenever your investments have been so successful that they alter your asset allocation, make sure you aren't tempted to simply coast and skip your review altogether. At a minimum, you should double-check with your financial professional if you're thinking about deviating from your strategy for maintaining your portfolio. After all, you probably had good reasons for your original decision.
• Some investments don't fit neatly into a common "stocks, bonds, and cash" asset allocation. You'll probably need help to figure out how hedge funds, real estate, private equity, and commodities might balance the risk and returns of the rest of your portfolio. Also, new investment products are being introduced all the time; you may need to see if any of them meet your needs better than what you have now.

Balance the costs against the benefits of rebalancing

Don't forget that too-frequent rebalancing can have negative tax consequences for taxable accounts. If you sell a stock that has appreciated, you'll be paying capital gains taxes. Because of this, you'll want to check on whether you've held it for at least one year. If not, you may want to consider whether the benefits of selling immediately will outweigh the higher tax rate you'll pay on short-term gains. This doesn't affect accounts such as 401(k)s or IRAs, of course. In taxable accounts, you can avoid or minimize taxes in another way. Instead of selling your portfolio winners, simply invest additional money in asset classes that have been outpaced by others. Doing so can return your portfolio to its original mix.

You'll also want to think about transaction costs; make sure any changes are cost-effective. No matter what your strategy is, work with your financial professional to keep your portfolio on track.

This information was developed by Broadridge, an independent third party. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. Investments and strategies mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Raymond James & Associates, Inc. member New York Stock Exchange/SIPC does not provide advice on tax, legal or mortgage issues. These matters should be discussed with an appropriate professional.