Buy and Hold means holding an asset through your financial objective’s time horizon. But that does not mean Buy and Forget. Periodically review your overall portfolio and individual holdings. Ensure they remain best in class, meet your needs, and fit within your Investor Profile and Target Asset Allocation. What factors impact portfolio review frequency?
All that and more in Episode 58 on the Wilson Wealth Management YouTube channel.
“How does portfolio risk impact review frequency?”
A relatively low risk portfolio may be reviewed less often than one with higher investment risk.
And that reflects both the type of asset and the level of diversification.
A low risk portfolio with one 5-year term deposit needs less a rigorous review than one with a variety of small cap, emerging market equities.
As well, investing in a broad index fund, with many holdings across different sectors and market caps, may manage overall risk better than if you created your own portfolio out of shares in Google, Amazon, Facebook.
“How do general economic and market conditions impact reviews?”
Systematic risk factors affect all companies (and people, assets) to some extent.
If inflation causes an increase in the prime lending rate, all borrowers will face interest rate hikes. The lower credit rating will be hit hardest, but even high quality borrowers will have to pay higher costs.
If a war breaks out where you live, manage a business, or invest, you will be affected.
The greater the probability that your investments will be impacted by systematic risks, the shorter the time span between reviews. Or, when you see a systematic risk arising, that may trigger a review.
The purpose of creating a well-diversified portfolio helps cope with systematic risk. If Canada experiences bad economic times, that may be buffered by also holding investments in Australia and Germany. If the equity markets go into a bear market, owning some fixed income (at a low to negative correlation coefficient), may provide some portfolio protection.
If your portfolio is not well-diversified, it is more at risk of systematic risk problems.
“Does my personality affect periodicity of reviews?”
Yes.
Some investors are more risk averse than others. Low-risk investors will often prefer a safer investment portfolio. That should mean less review time. However, their personality may be such that they will want quarterly or semi-annual reviews, regardless of the portfolio risk.
Conversely, some investors should be reviewing their portfolios (perhaps) quarterly. But their personality causes them to review every few years, when intending to sell something or the world is on fire.
As well, some people are very detail focused and some are quite relaxed. The detail oriented investor will likely want more frequent reviews (and spreadsheets with adjusted cost base, unrealized gains, yields, and such).
“Anything else that I need to consider?”
Material change.
Material changes are events that cause you to alter your decision-making.
You are single, living the good life. Not a care in the world. How you manage your life is a certain way. Then you get married and what was fine two years ago has now changed. Maybe vacation decisions went from a golf vacation with the gang or a trip to Ibiza to now choosing between the Louvre in Paris versus Tuscan wine tours.
Then, you decide to have a baby. Suddenly, you are googling “life insurance.”
Similar if you lose your job, get a promotion, have an accident, etc. Things that change your outlook and decisions.
With investments, material change is similar.
Much less of an issue with well-diversified portfolios. More an issue with less diversified investments, that are exposed to nonsystematic risks. Risks that are specific to that asset.
Nonsystematic risks include corporate management, operations, and competitors. It can also include customers, suppliers, credit, and legal. Plus additional risks that may be unique to a company or asset.
For example, you researched junior mining companies and found an excellent company. You invest. But three years later, management starts taking shortcuts in their operations. The company is now being sued for poor reclamation practices and environmental damage. Do you continue holding because – darn it – your strategy is to Buy and Hold? Or do you take that material information and revise your assessment based on real-time knowledge?
If you are not prepared to reassess investments in light of new information, perhaps you still hold shares in Enron, Kodak, Blockbuster, and horse and buggy companies.
But it should be significant information. Otherwise, you end up trading based on market noise and non-material events. It can take some skill and experience to separate out the material from non-material information. And yet another advantage to focusing on well-diversified investment products over individual stocks, bonds, etc. Much less concern in tracking individual assets, as the overall diversified portfolio helps to manage those nonsystematic risks.
To read a little more on this topic, please refer to “Buy and Hold: But Review”.
