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Staying on Track: Portfolio Reviews

Written by Vicki Cook

Portfolio reviews are an important part of any investment program. Here’s why.

There was once a time when investors could rely on selecting high-quality investments for their equity portfolios and virtually walk away. In most cases over the long-term, the portfolio would grow with little concern.

This may have worked in the past, but in today’s world this is not likely the best approach. Instead, keeping a watchful eye on the components of a portfolio is a good habit. This doesn’t mean that we should become day-traders. On the contrary, periodic portfolio reviews with selective changes should be an essential part of managing any portfolio.

Changes to a portfolio can happen at any time. A leading blue-chip stock in a seemingly solid industry may become a laggard. In extreme cases, we have seen companies disappear almost overnight, such as in the collapse of Lehman Brothers in the U.S. in 2008. Contrasting this, sometimes a holding can appreciate and become too dominant within a portfolio. This may be reason for celebration, but the portfolio may also require rebalancing. Remember – the objective is to maximize overall returns, not own a particular stock. Consolidation activity may change a portfolio’s composition. For example, cross-industry mergers may alter a portfolio’s industry diversification. Even entire asset classes can be affected during market swings, impacting the asset allocation of a portfolio.

Have your own objectives changed? Personal situations change over time. Income requirements, growth objectives, tax perspectives and more may all have shifted. What may have been an ideal portfolio for you in previous years may no longer be the best portfolio for you today.

There are many things to consider when conducting a review. Here are a few thoughts:

Don’t lose sight of your overall investing objectives and risk profile. Your investing objectives are meant to guide you when making changes to your portfolio, not your emotions. Various techniques can be used to support this process. One way to control risk is through portfolio rebalancing to restore a portfolio’s allocations to a level appropriate or the investor. Rebalancing helps to enforce a discipline of “sell high and buy low” because an investor is likely to sell appreciated assets, or buy assets that aren’t performing as well, to return to the allocated mix.

Don’t discount diversification. Maintaining a well-diversified portfolio is important to manage risks, but a diversified portfolio, by nature, may also mean that some components of your portfolio will lag others.

Consider whether the fundamentals have changed. The quality of an investment may have changed over time. A shift in such things as a company’s competitive position or a fund manager’s style or mandate may help to determine whether a weak-performing investment will improve over time, or if it may be wise to exit the investment. Look at high-performing investments. It may be difficult to sell investments that have done well in your portfolio, but remember that the objective is to sell high and buy low. Too often, sell decisions are driven by an aversion to loss, leading to a sale when the investment is losing value.

Don’t forget your time horizon. It is easy to become impatient with investments that perform below expectations, especially during difficult markets. But if you have a long-term time horizon, patience can be one of your greatest virtues. History has shown us that the market does advance, but the cycles of up and down are unpredictable.

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About the author

Vicki Cook

Vicki has 16 years of experience in the investment industry. Before moving to the predecessor firm to Macquarie Private Wealth, she worked with Ron Zwicker at Canaccord Capital as an Investment Advisor. Vicki has a Bachelor of Commerce degree with a specialty in Entrepreneurship from the University of Victoria, a Level II insurance† license, as well as the Canadian Investment Manager (CIM), Chartered Strategic Wealth Professional (CSWP), Financial Management Advisor (FMA) and Fellow of the Canadian Securities Institute (FCSI) designations. Her main focus is on preparing our financial plans and investment recommendations for clients. Like Ron, she is committed to ongoing continuing education to remain up-to-date on providing wealth management services. When she is not advising investors, Vicki helps to run a retail pet store in Sidney, BC with her husband, and enjoys spending time with her young son and two dogs. She started a competitive women's volleyball league in Victoria, and is active in operating and playing in the league.