It’s Almost Time For Annual Portfolio Reviews
In the investment management field, the terms rebalance or reallocate will be used to address the preservation of one’s portfolio. However, to keep it simple for understanding, we can humbly refer to this process as review and adjust. This step is solely about conducting a thorough review of your portfolio to determine: how investments performed, was annual goals reached, are there changes that need to be made, ensuring current positions are keepers, and turning over the portfolio for next year’s goals.
At the end of each year, pull out your list of goals written down and print out the current status of your investments. Most brokerage firms or investment accounts can provide a snapshot of your portfolio for the selected period of January 1 – December 31. Even if all your investments are spread out with several companies, obtain what annual reports you can, any will help. The majority of these reports will display the annual return on investment for the entire account, and this is what we want to view first. This allows us to see our overall progress for the year before we dive into each investment’s piece of the pie.
The annual return rate for the overall portfolio is the leading metric we seek at year-end and serves as the most prominent figure used to summarize each year’s results. Annual return rates can be viewed as following:
Poor – 0%≤
Marginal – 0-3%
Decent – 3-6%
Solid – 6-10%
Excellent – 10-15%
Outstanding – 15%+
Most portfolios consist of a few different investment vehicles, so reviewing how each asset performed throughout the year is important. Each investment plays an integral part of the overall portfolio. Every year will not be the sweet spot for every investment, which is why having a collection of strong assets that grow as a unit helps soften the down periods. A negative return for the year does not mean it’s time to move on, just as a double-digit gain does not constitute an immediate sell for profit. A 20% gain does not represent a 40% gain by next year’s end, but it could grow towards a 60% return after 4 years.
Were Annual Goals Reached?
Prior to each new year, we set annual goals for our investment portfolio. One may have been to capture an increase of greater than 10% for the overall portfolio. Another could have been to acquire a new investment under a different asset type other than what is currently in the portfolio, such as a rental property or enrolling in a 401(k) plan. A promising goal would have been to increase retirement contributions for the year.
All goals that benefit the overall portfolio as a whole, and put the ultimate prize a bit closer are excellent marks to reach. Whether it was one, two, or several goals, take this time to check how the year measured up. If any fell short, no worries – this next year always has the potential to shine brighter.
Any Changes Needed?
The key to never experiencing panic at any point throughout the year is to always stay aligned with your principles no matter what the economy is feeling. This is not to say changes are never needed. Sure they are. Not every investment has a holding period of forever. Investments reach their peak at some point, and while you are growing your portfolio for retirement, there is not a lot of time to waste with positions that drag the entire group down.
If the year-end reaches and expectations were not met for a particular asset, it’s totally fine to pull the sell trigger. Only if three factors present themselves: the research reveals the asset is becoming increasingly weak, your confidence has waved in the investment and you believe it has no turnaround, or another opportunity has risen that screams a superior investment.
Validate Current Positions
To truly benefit from an outstanding investment the vision should be long term. Quickly jumping in and out of positions to combine profits is sustainable short-term, but over time the fees, commissions, and taxes will add up. Therefore, the majority of your investments, if not all, should be held for many years. During the year-end review process you may find there are zero positions that need to be removed. In fact, there may be evidence pointing to the opportunity of increasing a position.
A portfolio should mandate outstanding positions only. Any investment that rolls over to the new year should meet your criteria as an outstanding player in the portfolio. Remember, slow and steady wins the race, so only strong and steady positions that grow every year.
Next Year’s Plan
You have reviewed the portfolio’s performance. You have adjusted the portfolio to its ideal point. Now it’s time to game plan for the upcoming year. Start off with any unattained goals from last year. If you would like to attempt that milestone again, add it to the list. But this new year is also the opportunity to create a new goal to reach. Something to strive for that you have not attempted before. New years in investing bring so much potential for life changing marks on your retirement path.
Say the markets experienced a down year, what Wall Street calls a Bear Market, so your portfolio only gained a modest 5%. Well this is the opportunity to take that 5% and aim for an annual gain of 15%. This will bring the two-year average to double digits – 10%. Any professional investor will inform you of the excellence in returning an average of 10% annually. If you do not own any stocks currently, make it a priority to acquire a reasonable amount of shares in one outstanding company. Stocks have proven elite an investment for the long-term. Every year provides the prospect for compounding on the prior year’s success.
The Truth About The Process
Often enough investors will either forget to perform a review of their portfolio or honestly may not know how to execute a productive examination of their current status. This inhibits the possibility of getting out of a weak position due to the omission of the underlying data. An investment can appear to be performing just fine throughout the year, but behind the scenes can be seeing diminishing value. For example, a stock price could have climbed 6% over the year, but its last financial statements released show a steady decline in company assets and a startling increase in long-term debt. This could be a sign the stock price may be due for a drop in the near future, but without examining your portfolio you would not be aware of such.
Do not be discouraged if there is doubt of how effective your review is coming out. Unless you are simply skimming through annual statistics for 5-10 minutes, then there is no wrong way to conduct the review. It’s all about ensuring your investments stay on the trajectory towards your ultimate goal. Take this time to view if your decisions played out as well as you hoped. If an investment did not go as planned, that is okay, as long as it was not a portfolio destroyer.
There is not a single investor who hits a home run on every investment. There will be losses occasionally. Learn from your mistakes and make sure you don’t fall down the same hole next time. It’s always better to gain little or no money on an investment than to lose a single dollar on a gamble.
Chart your progress over the years. It’s a great tool to visualize how well you are doing. It always gives you positive reinforcement seeing your portfolio growing. We all have seen stock market charts of companies with a linear upward increase in price. Why not view the same growth of your very own portfolio. Once you have reached a set goal, celebrate, and then focus on obtaining the next goal. The review process can be fun, as long as you are investing prop