Investors should periodically review their investment portfolios. Based on the review, rebalancing may be necessary.
Factors that may dictate rebalancing include: individual holding performance causing misalignment with target asset allocation; material events causing a revised target asset allocation and need to rebalance to new mix; underperformance of individual holdings against peers or designated benchmarks.
How to review and when to rebalance are relatively straightforward.
But a common question is: “When? When should I review my portfolio?”
Material Event
A good idea is to review your portfolio whenever a material event occurs in your life.
That could be a market related event. The crash post 9-11. A war breaking out. A clear trend in interest rates or inflation.
If you own individual, non-diversified investments, such as stocks, events that impact the specific companies. Perhaps Apple has come up with their next iPod or iPhone concept. A revolutionary product that will change the marketplace. Or perhaps Tesla car batteries easily catch fire, resulting in major class action lawsuits.
A material event may also be personal. Marriage. A new baby. An inheritance. Job loss. These events may affect your investor profile, necessitating a change in your target asset allocation and investments.
In any of the above examples, probably not prudent to wait 8 months for your normal, annual review before assessing their potential impact on your portfolio and investment strategy.
Portfolio Risk
Not quite a “when”, but more of a “how often” issue. Though the two are definitely linked.
Many experts recommend annual reviews. In general, they are probably correct. But that is too simple a statement.
It may be wise to review a portfolio annually. But the periodicity should reflect the portfolio’s risk not the calendar.
If you invest in a basket of well-diversified, low-cost, index funds, an annual review should be sufficient. Subject to changes in material events as discussed above.
If you invest solely in small to mid-cap companies, you may want to keep a closer eye on holdings. Maybe quarterly or semi-annually. If your portfolio is made up entirely of stock options, you will want to monitor on a daily or weekly basis.
The higher the volatility (i.e., risk) of a portfolio, the shorter the time periods to review.
Investor Risk Tolerance
Similar with investors and their peace of mind.
A very risk averse investor probably cannot sit back and review on an annual basis. Regardless of what is in the portfolio. And it will likely be a relatively low risk portfolio, given the investor’s risk tolerance. This investor may want to check the portfolio weekly or monthly, even if annual may be reasonable.
Okay, the “When?”
We will assume an annual review. Semi-annual, quarterly, or even monthly are simply pieces of that pie.
Year End Review
The obvious date to review a portfolio is as of December 31. You get your year end data and review in January.
Very common. The date is intuitive. You can access lots of information, such as year end financial statements, tax information, fund data at year end, etc.
However, there are a few downsides to using December 31.
December 31 data may be a bit skewed. Stock prices may reflect tax based selling more than actual performance. Companies with December 31 year ends may speed up revenue recognition (or even increase losses) to make their annual results look strong (or clear the decks for the next fiscal year). Funds may engage in a little “window dressing” to adjust for style drift or underperforming assets they owned during the year.
What you see in December 31 data, may not always be the best measure of an investment.
Year End Costs
Another negative aspect of December 31 reviews is that most investors do them.
If you rely on a financial advisor to assist in the review, January and February will be an advisor’s busiest time of year. That may mean increased fees as demand will be high. It may also mean less attention to you.
Non-December 31 Review Date
Why not choose a non-December 31 review date?
I might choose June 30 or September 30 instead. You can also consider March 31. However, for many advisors, April is extremely busy with tax season. And then many advisors want to vacation in May, post tax. But if you are willing to wait until mid-May for a March 31 effective date, that would also work.
For most public companies or funds, these are normally quarter-end periods. There may be better or more information available at a quarter end versus a regular month end.
There may be less distortion in companies and fund results than at year end.
Your advisor may have excess available time in non-peak months. This may mean lower fees and greater attention. And, I can assure you, a grateful advisor for shifting the work load from peak demand into a traditionally light period.
Another useful feature of reviewing in July or October, is that it helps set up planning for the coming year end. Hard to discuss prudent pre-year end moves in January of the next year. But if you are considering tax planning or how portfolio changes may impact your end positions, better to consider them before year end. When there is still time to act.
