Thursday, January 3, 2013

Annual Portfolio Review


Annual Portfolio Review

The onset of the New Year is money management’s opportunity to get you, the investor, to make changes in your portfolio.  The big mutual fund houses, such as Fidelity, will suggest that it’s time to give your portfolio a check up.  Institutional money managers will advise their clients to “rebalance” their portfolio or swap a growth mandate for a value one.  In fact, it is a good idea to take a look at your investments periodically.  Typically, a bit of self-examination is all that is required, and the best decision is to do nothing.

The most important part of the self-examination is a quick review of the asset allocation.  How much do you own in stocks, bonds, and perhaps real estate?  Have the percentages changed much in the last year?  For example, if your assets are usually about 50% stocks and 50% bonds, you probably don’t need to do anything to get back to those proportions unless the stock or bond proportion have risen to something like 60%.

Will They Let Us? (1995)


It’s not a bad idea to take a look at your managers or funds.  In my view, you should focus on those managers or funds who have performed very badly and those that have done extremely well.  Everyone else, those who are within several percentage points of the market averages, can probably be left alone.  The extreme laggards, particularly if they’ve lagged for more than a year should probably be axed.  However, the extreme winners are also suspect, because their unusually good performance is probably the byproduct of luck, and will be followed by mediocre performance (known as a regression to the mean).  You should also be deeply suspicious of any fund where the portfolio manager has changed or the investment company is being sold.  These types of changes are distractions that almost always hurt your investment performance.

If you ask your broker, consultant, financial advisor, or money manager to examine your portfolio, there’s virtually a 100% certainty he’ll find something wrong with it.  Inevitably, the fix will be a product or service that generates more profit for him.  When I was Chief Investment Officer for the North Carolina pension plan, we asked all our money managers to evaluate our assets and make recommendations to improve our performance.  Our international managers thought we needed more exposure to foreign markets.  Our domestic managers advised us to increase our allocation to US stocks.  You can guess what the hedge fund, private equity, and real estate managers recommended.  We spent a couple of hours in the Treasurer’s Office leafing through the thick presentation books, which were filled with statistical models.  It’s hard to believe that optimization models and Monte Carlo simulations could produce roars of laughter.  We were amused by the self-servicing advice.

As 2013 begins, it’s not a bad idea to have a gander at your portfolio.  In many cases the best advice will be to do nothing.  Don’t expect investment professionals to have that advice in their repertoire.

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