Smart Ways to Monitor Your Portfolio

Portfolio Planning Article

Charles Schwab & Co., Inc.

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Smart Ways to Monitor Your Portfolio
by Bryan Olson, CFA, Vice President, Head of Portfolio Consulting, Charles Schwab & Co., Inc.
May 27, 2004

Constructing your investment portfolio based on a carefully selected asset allocation plan is an important start to achieving your financial goals. But having done so—even if you consider yourself a long-term investor with a sound plan—you can't simply consider yourself "finished" and ignore your investments. You need a framework for monitoring and maintaining your portfolio.

Monitoring your portfolio is like a long sailing journey. Before embarking, you must chart a course to your final destination. This is akin to understanding the goals and risk tolerance of your portfolio—you need to understand where you're going and the risks involved with getting there. With sailing, currents and wind patterns affect your speed and position, so periodic adjustments are necessary to stay the course. These forces of nature are similar to movements in the market that may take your portfolio off course.

Monitor asset allocation and diversification
Asset allocation and diversification are the building blocks of your portfolio.

Your target asset allocation should be determined by your risk tolerance. While your personal risk tolerance shouldn't change, the risk profile of your portfolio can and will change based on movements in the market and individual securities. You need to ensure the risk profile you originally chose is consistently reflected in your portfolio, which you can do by rebalancing back to your target asset allocation.

Portfolios that are not rebalanced can be much more volatile over time that portfolios that are periodically rebalanced. Schwab looked at two portfolios invested in 60% stocks and 40% bonds 25 years ago. The first portfolio was never rebalanced, while the second was rebalanced back to 60% stocks at the beginning of each year.

At the end of 2003, the ending dollar value of the two portfolios was less than 4% apart. However, when we looked at what each investor experienced during those 25 years, we found the range of annual returns varied dramatically. The first portfolio ended up with a final allocation of nearly 80% stocks, and the difference between the highest and lowest annual return was 25% wider than the rebalanced portfolio.

Rebalancing smooths out returns and keeps you closer to your target asset allocation¹

A portfolio with a higher percentage of stocks is one that's subject to greater risk. Unfortunately, many investors only realize their portfolio has taken on more risk when the market starts to retreat, and they end up making poorly timed decisions—the opposite of the mantra, "buy low, sell high."

Another key is monitoring your portfolio to make sure you're properly diversified within each asset class. Make sure no security, style, sector or industry within a particular asset class has grown unduly large, thereby throwing off the risk and return characteristics of the asset class—which then impacts your overall plan.

Monitor the quality of your stocks and mutual funds
Companies change over time; a scan of the headlines shows how quickly it can happen. When you initially pick individual equities, you want to look for highly rated stocks, but it's important you monitor companies over time since today's blue-chip can lose its competitive edge or become tomorrow's scandal.

Mutual funds can change over time as well, so it's good to periodically monitor their quality and style to make sure they match the rationale you used when you first selected the fund. Your progress toward your financial goals depends on your investment plan and the quality of the investments you own, since they impact the return your portfolio generates.

Time for a change?
In addition to portfolio return, your ending wealth depends on two very important factors: the amount you save and the amount of time your money and investments compound. You may need to make mid-course corrections to keep your goals within reach. Just as it's impossible to sail in a straight line without some tacking, your portfolio occasionally requires small adjustments to get back on course.

When you actually make changes to your portfolio will vary depending on the market and your personal situation. At the very least, you should undertake a summary review of your portfolio twice per year, and a more in-depth review at least once per year. And if you primarily invest in stocks, you may want to check more frequently for news items that may dramatically impact a company.

Don't wait to act
The reason why you monitor—and if necessary, change—your portfolio is to meet your long-term investment goals. You should be informed about your investments and what's going on the markets and world at large so you can take corrective action before it's too late. Sadly, we often see investors who need help but have limited time to make the necessary changes to their portfolios, which can affect their ultimate wealth.

Many resources available
Fortunately, there are people, tools and technology that can help you monitor your portfolio. A can assess your asset allocation, diversification and security quality, and Schwab has many helpful online tools available for customers.

How you monitor your portfolio depends on your interest level and time commitment. If you have less interest or time, you may want to consider getting advice from an investment professional. (For more, see Getting Advice For Your Portfolio).

Just like a sextant or a captain can help navigate a course on the open seas, there are tools and investment professionals to help you monitor your portfolio. Instill some discipline in your investing process, get expert help if needed and monitor your portfolio periodically, and you'll have smoother sailing toward your financial goals.

1. Source: Schwab Center for Investment Research® with data from Ibbotson Associates, Inc. The two portfolios shown were composed of 60% stocks and 40% bonds at the beginning of 1979, with the S&P 500® Index representing stocks and the Lehman Brothers U.S. Aggregate Index representing bonds. One portfolio was rebalanced back to its original allocation at the beginning of each year through 2003, and the other was not. Results assume reinvestment of dividends and interest. Indexes are unmanaged, do not incur fees or expenses, and cannot be invested in directly.

You must open or maintain a Schwab brokerage account to receive the Schwab Portfolio Consultation. Portfolio Consultation is a brokerage service and your account will be a brokerage account and not an investment advisory account regulated under the Investment Advisers Act of 1940.

Investment strategies such as diversification do not assure a profit and cannot guarantee protection against losses in a declining market.

The information presented does not consider your particular investment objectives or financial situation and does not make personalized recommendations. This information should not be construed as an offer to sell or a solicitation of an offer to buy any security. The investment strategies and the securities shown may not be suitable for you. We believe the information provided is reliable, but Charles Schwab & Co., Inc. ("Schwab") and its affiliates do not guarantee its accuracy, timeliness, or completeness. Any opinions expressed herein are subject to change without notice.

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