Portfolio management is determined by your long-term goals and includes what you invest in (asset allocation), your strategy for adjusting your portfolio, and some basis for creating your portfolio and managing risk, typically a benchmark or market index. Beware of illiquid investments, and target-date funds, as these might not be the best fit for your particular circumstances.
Where are you investing? How are you managing those investments? Do you have a clear sense of your long-term financial goals?
Some investors can answer these questions with confidence. But for many investors, questions like these trigger fear and uncertainty—perhaps even a sinking sense in the pit of your stomach that you’re not giving your investments the attention they deserve. If you fall into this category, rather than despair or avoidance, we suggest that you start off by thinking about portfolio management—what it is, potential pitfalls to avoid and whether you might benefit from help managing your portfolio.
Portfolio management is an important and often misunderstood aspect of financial and retirement planning. Understanding portfolio management more fully can help you ensure that your investment plan is aligned with your long-term goals, that you have a sound strategy for making and adjusting your investments, and that you’re balancing risk and return in a way that makes sense given your unique situation and investment time horizon.
What is Portfolio Management?
Portfolio management encompasses:
- What you invest in. Your choice of investments—known as asset allocation—is one of the most important decisions for any investor. Asset allocation refers to deciding what portion of your portfolio to invest in equities, what portion to invest in fixed interest and what portion to invest in other asset classes. Sub-asset allocation includes decisions about what country, sector or style of equities or fixed interest you own. The final decision is usually which individual equities or fixed interest bonds to invest in.
- How and when you adjust your investments. Once you’ve decided on an asset allocation, you’ll still need to manage your portfolio. You’ll likely want to have a clear strategy to determine when to make adjustments to your portfolio. A proactive process and criteria can ensure that you don’t find yourself in the difficult position of making reactive buy and sell decisions or be unduly swayed by short-term market performance.
Effective management typically:
- Focuses on your long-term goals. The best portfolio and investing strategy for you is determined by your long-term goals and your individual situation (for example: age, family, investment time horizon, expenses and tax considerations). This may seem obvious but it’s worth remembering that you are the starting point for your investment strategy.
- Uses a benchmark. A benchmark, typically a market index, provides a framework to construct your portfolio, manage risk and monitor performance. Simply aiming to achieve a fixed rate of return each year can create disappointment when capital markets are very strong and greatly outperform your objective—and is potentially unrealistic when capital markets are very weak.
- Is dynamic and flexible. Over 10 or even 5 years, your situation may change, as can market fundamentals. A flexible portfolio—one that is relatively liquid and easy to buy and sell—can ensure you are able to respond by making the appropriate adjustments.
A few potential portfolio management pitfalls:
- Target-date funds. Such funds can work well, especially when retirement is decades in the future. But as you near or enter retirement target-date funds typically shift to conservative investments. While these investments mitigate short-term volatility, they may have limited growth potential. Depending on your cash flow and capital appreciation needs this may be appropriate. But it also could leave you susceptible to shortfall risk—the risk of falling short of your investment goals by not achieving the returns you need. To keep pace with inflation and to fund a long retirement you may well need more growth than you realize.
- Illiquid investments. Investments that are difficult or costly to buy and sell can be risky, especially given the unpredictability of life and financial markets. If you’re invested in funds or insurance products that come with substantial entry, subscription or exit fees, you may be limiting your ability to adjust your investments as the market outlook or your circumstances change. While such investments are liquid, the fees and penalties may make selling them much less attractive.
- Failing to understand risk and reward trade-offs. Assessing risk tolerance is essential, but so too is understanding the risk and reward trade-off. Less volatile or risky investments tend to offer lower long-term returns. But owning conservative, lower risk assets could open you up to the risk of running out of money—shortfall risk—or of failing to meet your long-term goals. Historically, equities have yielded high returns, but are more volatile in the short-term. If you are able to tolerate the risk and be a long-term investor, equities can be attractive and an important component of your portfolio.
Is a discretionary manager a good fit for you?
Fisher Investments UK is a fee-only discretionary money manager. Our US parent company, Fisher Investments, began managing assets in 1979 with the goal of always putting clients first. We now help over 100,000 clients globally.[i] If you have £250,000 or more to invest, we may be able to help you by creating a portfolio tailored to your circumstances and focused on your long-term goals. The management of your portfolio can be a complex and time-consuming process. There’s no need to go it alone.
For more information about retirement and financial planning, contact us today or download one of our brochures.
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[i] Clients of Fisher Investments and its affiliates as of 31/03/2019.