Mid-Year Portfolio Checkup

By
Posted on July 7th, 2011

A slew of economic events has occurred in the first half of 2011, and with it comes portfolio changes.   With the end of the Fed’s bond purchases (“QE2”) and the Greek austerity measures behind us (for now), it’s a great time for a review of your portfolio.  A few simple things to look at…

1.)    Your Plan

A disciplined approach requires the use of an Investment Policy Statement.  Even if you’re a Do-It Yourselfer, a written approach to your investment philosophy will help you stay the course immensely.  Things that should be included are:

    a)  your strategic (long-term) asset allocation,

    b)  whether you will make any tactical shifts based on your analysis,

    c)  expected losses during the inevitable downturn, and

    d)  your approach to rebalancing (whether you do it through tactical adjustments, on a calendar basis, or when assets exceed some predetermined level). 

2.)    Asset Allocation

Your current asset allocation will drive your potential returns and your actual risk.  How much do you have in stocks, bonds, and cash?  If you do not make tactical adjustments through time, you need to rebalance as growth in one asset class or the other can throw your allocation out of whack.   Use of a software system to review this will save you many hours.

3.)    Savings Rate

Frankly, if you save $50 per month and have no outside assets, all of the fancy asset allocation and rebalancing strategies in the world won’t save you from being a hostage to social security.  If you are in the accumulation phase, are you saving enough to accomplish your goals? 

Figure out how much income you’ll need in retirement, subtract your social security calculation you receive annually (with an appropriate discount if you’re concerned about those benefits being cut) and apply your future portfolio to see if it can fill the gap.  Your future portfolio will be able to create an income stream of about 5% of its principal with inflation adjustments if managed properly. 

While there are many other variables, don’t let the pursuit of the “perfect” plan get in the way of at least creating an adequate plan. 

Hint: if you’re not saving at least 10-15% of your current income and you do not have a windfall or other assets, it’s very likely you’re not going to make it.