A Fresh Look: Improving Your Chances for Investment Success

After six straight years of market gains, the financial markets’ recent correction provides an opportunity to reevaluate your portfolio and determine how well you are positioned to meet your unique investment goals.

A portfolio review examines your overall investment plan and can uncover and address any weaknesses in your portfolio that might prevent you from achieving your goals.

In the aftermath of the last financial crisis, many investors hold assets at multiple financial institutions, furthering the need for regular, high-level portfolio assessments. To evaluate the whole portfolio, it is critical to consider all accounts as part of one investment plan, regardless of where assets are held. Portfolio reviews can help mitigate risk by identifying overlap across multiple advisors and investments that could cause excess exposure to a single security, sector, region, or currency.  

In the current low-return environment across multiple asset classes, it is particularly important for investors to focus on the factors within their control: strategic asset allocation, investment selection, fees, and taxes. Conducting a portfolio review provides a fresh look that can help investors optimize their portfolios for any market environment. 

The Key to Investment Success – Asset Allocation

A strategic asset allocation aims to achieve optimal risk-adjusted return by diversifying across multiple asset classes, such as stocks and bonds. Seminal studies have indicated that about 90% of variability in returns is attributable to strategic policy decisions, rather than security selection. Long-term investors should consider their individual goals, risk tolerance, and investment timeframe when making this critical asset allocation decision. Once the asset allocation plan is determined, it is crucial to stick with that plan regardless of short-term market movements.  

One of the most common potential mistakes that investors make is allowing current market conditions and emotions to dictate allocation decisions. Bull markets tend to make investors aggressive and bear markets make them apprehensive. Many investors put 100% of their portfolios in Dot-Com stocks leading up to the market peak in 1999, and piled into gold and cash during the lows of 2009. Adhering to your investment plan and rebalancing regularly so that your portfolio never strays too far from its asset allocation will prevent emotional decision making. Rebalancing also trims exposure to areas that have done well, and adds to those that have done poorly, forcing you to sell high and buy low. 

Investment Selection

Irrespective of the investment vehicle used (mutual funds, managers, ETFs or individual securities), it is important to conduct due diligence and periodically evaluate holdings. Some key considerations when selecting mutual funds and managers are the long-term track record, experience of the management team, and investment philosophy. The portfolio review process can help investors to clarify what they are trying to accomplish with their investments and decide whether their current investment plan is appropriate for their risk preferences and investment objectives. Current market conditions should also be taken into consideration when evaluating investments. For example, an investor should be aware of not only the amount of bonds in his or her portfolio, but also the type of bonds. A conservative portfolio with a 75% allocation to high quality bonds could still be quite risky if those bonds had durations of 30+ years because of the interest-rate risk on longer-duration bonds.  

Impact of Fees & Taxes on Portfolio Performance

Over the long run, paying attention to fees and taxes can have a noticeable impact on your total return.  This is particularly important in the current environment where expected returns in most asset classes are low. It is crucial to assess your investment returns net of fees. Portfolio reviews will evaluate total fees, including advisory fees and fees on the underlying investments, to help you determine if you are overpaying for your portfolio. Although high fees and taxes can erode your performance significantly over time, there are actions you can take to mitigate them as much as possible.

Simple tax strategies to consider include holding period management (holding securities for longer than one year to benefit from the lower long-term capital gains tax rates), tax loss harvesting (assuming the intention is not to continue holding the position), and charitable gifting of highly appreciated securities. A portfolio review should not only consider asset allocation, but also asset location. If appropriate, high-income-generating assets could be held in tax-deferred retirement accounts; a traditional IRA could be rolled over to a Roth IRA to avoid tax on future retirement distributions; and assets could be placed in various types of trusts to reduce estate taxes. Coordinating tax and investment strategy can result in significant tax savings that can help you achieve your financial goals. 

Conclusion

During this period of heightened market volatility, now is an opportune time to reevaluate your portfolio. An objective portfolio review can help you clarify your financial goals and ensure that your portfolio is positioned well to meet them. While markets are unpredictable, ensuring that your portfolio has an appropriate asset allocation, low fees, and is tax-efficient will better position you for any market environment.