By Bruce Buerkle, CFA, Vice President and Manager, Securities Research Support
With the considerable market swings that have occurred during 2015, a year-end review of your portfolio is even more essential to make sure you are on track to meet your long-term investment objectives. There are a number of key points to take into consideration and your Benjamin F. Edwards & Co. financial consultant has the tools to provide the information needed to help you work through these questions.
- Investment Objective Has your investment objective and risk orientation changed since your last review? Are you seeking growth, growth and income or income? Have you performed a risk assessment to see where you fall on the spectrum from conservative to moderate to aggressive?
- Investment Horizon What is your investment time horizon? You may be younger with many years to contribute to your portfolio and have the principles of compound growth and dividend reinvestment work for you; or you might be near retirement and more conservative, income-producing investments may be more important and suitable.
- Lifestyle Do you anticipate any other lifestyle changes that need to be considered in year-end portfolio planning? Even if there has not been a change, it is important to look at your current asset allocation to be sure your investment mix of cash equivalents, bonds and stocks, or funds in these asset classes, remains appropriate. Assets classes can produce different returns, both positive and negative, depending upon the stage in the economic cycle and sensitivity to domestic and global events.
- Diversification Is your portfolio properly diversified both across and within asset classes? Diversification is essential in order to spread risk and widen the potential for gain. Rules of thumb include no more than 15% of a portfolio in any one security and no more than 25% in any one sector, with a guideline position size of about 5%. Too many small positions can make a portfolio difficult to manage.There are 10 sectors represented in the S&P 500 and you should have representation in most if not all of them in order to mitigate risk either through individual securities or funds. Check to see if you have any over-weighted or concentrated positions. Investments that are too heavy in one or more securities can exposure your principal to great risk should an unforeseen development occur with the company or in its industry.
- Rebalance Although rebalancing is appropriate at any time, it should be part of your year-end review. Most of your position values are likely quite different than they were at the beginning of the year. Therefore, if we look at how your assets are allocated across asset type, investment style or equity sector, the weightings may be different due to varying security and asset class returns and this movement could be exposing your portfolio to increased risk. Rebalancing is the process of buying and selling securities in your portfolio in order to restore the investment to its original state. If your investment objective and risk orientation have changed, rebalancing would move your weightings closer to the appropriate levels.
- Review All Investment Assets When reviewing your portfolio, be sure to take all investment assets into consideration in order to have a unified approach and to check for overlaps that could increase risk. Of course, potential tax ramifications always need to be taken into consideration when making any changes in your portfolio.
No investment strategy, including rebalancing, asset allocation and diversification, can guarantee a profit or protect against loss in periods of declining values. Rebalancing investments may cause investors to incur transactions costs and, when balancing a non-retirement account, taxable events will be created that may increase your tax liability.