Some Dos and Don’ts for a 2020 Portfolio Review

With 2020 about to wrap up, annual reflections and reviews are common^[i]—including of investment portfolios. There is nothing special about a calendar year, and reviewing such things in 12-month chunks has always struck us as rather arbitrary. But if you choose to conduct a year-end portfolio performance review, we think these dos and don’ts should be front of mind.

Do: Assess returns against a comparable market index (or mix of indexes).

Global equities are up 15.7% for the year.^[ii] Depending on your asset allocation—your portfolio’s mix of stocks, bonds and other securities—that may not be the best reference point for your entire portfolio. If you have a good chunk of your assets in bonds, comparing the totality of your portfolio to stocks alone would be inaccurate. Instead, measure each portion against the most relevant benchmark. For example, you might measure your bonds against a broad bond index, like the ICE BofA 7-10 Year Corporate-Government Bond Index. For stocks, if you are invested globally, measure that portion of your portfolio against the MSCI World Index, not the US-focused S&P 500 index. For instructions on how to access these indexes on publicly available sites, here you go.

If your stock holdings collectively underperformed a lot or outperformed by a mile, you may want to take a closer look at your portfolio holdings. It likely means you are taking too much risk by concentrating in certain companies or sectors. Adjusting your portfolio’s weightings to be more in line with the broader market can address overconcentration risk. MSCI’s factsheets have all the information you need on sector and country concentrations as well as top-10 holdings’ portfolio weightings.

Do: Review how your investment theses played out.

If you felt strongly about a certain sector or security at the beginning of the year, did the results match your expectations? Perhaps more importantly, were your reasons for optimism or pessimism correct? For example, if you thought Consumer Staples—considered a defensive sector—would rise because you forecasted market instability related to the US presidential election, did that come true? Sure, the Consumer Staples sector is positive year to date—but returns since the election have been very nice, and Staples is trailing the broader market year to date. We aren’t saying anyone could have predicted this year’s pandemic-driven shutdown of the global economy. But even with that backdrop, the prior bull market’s leadership trends persisted—so how did your investment theses hold up? Looking ahead, what lessons can you apply to future investment decisions? Is there anything to update or remove from your investment process? 

Don’t: Make knee-jerk reactions if you aren’t pleased with how things went.

No investment manager, whether a professional or yourself, will have a good year every year—on an absolute or relative basis. Rather than react to a disappointing year by making sweeping changes to your portfolio and chucking your approach out the window, review your decision-making process. Was it principled and based on forward-looking expectations? Can you identify specific errors and apply the lessons for the future? Are you comparing your process to someone else’s whose situation isn’t comparable to yours—or who made an unwise decision but got lucky? If your neighbor became a millionaire by going all-in on a certain electric automaker whose stock doesn’t behave like an automaker, good for them, but if you are investing for retirement, their approach probably doesn’t match your long-term goals. One year and the general fear of missing out don’t invalidate a sound plan—especially if you are invested for the long term.

Do: Focus on the forest, not the trees.

When investors examine successes and failures, eyeballs usually gravitate to the high flyers and biggest laggards. While understandable, these outliers tend to cancel each other out if you are properly diversified. Instead of focusing on the best and worst performers, we think investors should pay more attention to how the bulk of the portfolio—which drives most of the returns—fared. The totality of your investment decision making matters most of all—not whether a handful of selections did extremely well or poorly.

Don’t: Accumulate pride or block out mistakes from your memory.

A fair performance assessment takes stock of what went well and what didn’t. But in our experience, many investors tend to credit successes to personal skill or foresight—and laggards to bad luck. If you have holdings do well, was that luck or skill? We think it is important to recognize the difference, lest you get too high on good decisions, think you are infallible, and take increasingly more risk. If you made decisions that didn’t work out, don’t ignore them. Find the lessons in your mistakes and remember them for the future. That is where improvement comes from.

As you consider these dos and don’ts for 2020, take the lessons you have learned to 2021 and beyond, too—long-term investing is an ongoing educational process, regardless of your experience level.