Whether you are a novice or experienced investor, it is critical to review your investment portfolio at least once per year – but particularly during times of uncertainty and volatility. A portfolio review can help you evaluate and confirm your strategy, ensuring alignment with your financial goals, and much more. In this episode of The Agent of Wealth Podcast, host Marc Bautis is joined by Kayla Waller, Financial Planner at Bautis Financial, to guide you through five important considerations to make when you conduct an investment portfolio review.
In this episode, you will learn:
- How to review the risk you are taking with your investments and adjust your asset allocation.
- Why significant positions that represent a large percentage of your portfolio should be considered during an investment portfolio review.
- Reasons for consolidating accounts in your portfolio.
- Reasons for opening new accounts in your portfolio.
- How to create a plan for periods of market volatility.
- And more!
Welcome back to the Agent of Wealth Podcast, this is your host Marc Bautis. Today, I’m joined by my colleague Kayla Waller, who’s a financial planner at Bautis Financial, to talk about how to conduct a checkup on your investment portfolio. Kayla, welcome to the show.
Hey, Marc. Thank you.
Before we get into what an investment review or checkup looks like, I want to first talk about why you should review your investments.
Why You Should Review Your Investments
Regular investment reviews are a great opportunity for you to assess your progress toward your financial future, and ensure your portfolio hasn’t drifted away from the asset allocation that best matches your risk tolerance and time horizon. Perhaps you want to:
- Review the risk you are taking with your investments and want to consider adjusting your asset allocation;
- Make a contribution to or withdrawal from an investment account; or
- Discuss the current market outlook, the Fed’s monetary policy, or other economic trends.
Whatever the case, we believe in reviewing your investments at least once a year to ensure your strategy aligns with your needs and goals.
So today, we’ll talk about five things to consider when you do an investment portfolio checkup. And this conversation works in conjunction with a free checklist we’ve made available that outlines 25 key considerations to guide your investment portfolio analysis.
This week, I took my car to the mechanic for a 27-point inspection, used to gauge the health of a car. Similarly, this 25-point checkup is used to gauge the health of your portfolio.
So, let’s get into it.
1. Do You Need to Assess or Review Your Risk Tolerance?
When it comes to investments, one of the first things you want to get a handle on is your risk profile. There are many ways to do this, but most people decide their risk by gut feeling.
We like to take a more quantitative approach to risk management. Kayla, can you talk a little bit about how we assess someone’s risk?
Sure. There are a couple of different parts to risk:
- How you feel about risk in.
- What risk is currently in your portfolio.
- How much risk you need in your portfolio to meet your goals and objectives in the future.
To answer these questions, we use software that helps us answer these questions so we can put a plan into place and set expectations for an individual’s portfolio performance.
Related: Get Your Personalized Risk Score!
Exactly. So, the way the software works is it looks at the investments in a portfolio and it quantitatively puts a number associated with risk on that. We then try to match that number up to the same amount of risk that the investor is comfortable with, and assess if that risk is enough for them to reach their financial goals.
Taking no risk sounds appealing – you know, putting your money under the mattress – but the reality is that most investors have to take on some risk to get the growth needed for their individual goals of retirement, etc.
But you want to take the appropriate risk. You don’t want to take too much, but you need to take enough.
Arguably the most important aspect of risk is the question of: “How much risk are you comfortable with?” That’s because if an investor takes too much risk, and there is a market drop, they’re more likely to make irrational decisions – like selling off – causing disruption to their long-term financial plan. So, we try to avoid that issue by correlating those three risks together.
2. Do You Have Any Significant Positions That Represent a Large Portion of Your Portfolio?
The next consideration we’ll talk about today is: Do you have any significant positions that represent a large portion of your portfolio? We come across this a lot. Kayla, can you talk about why someone would want to address this?
Sure. Some employers offer stock as a benefit to employees – and that’s great – but some investors don’t realize how overexposed they are to that particular company.
Depending on the size of an investor’s position in a specific stock, their entire financial health could be tied to it. By diversifying away from that, you’ll become less concentrated, which will minimize some of the risks that you can control while still having the potential for gains.
This is something that happened pretty frequently during the pandemic with companies like Zoom and Peloton. At the start of the pandemic, business was booming and stock prices were high, but over time… not so much. Those people with significant positions in their employer’s stock got crushed.
Even more recent than the pandemic, we saw this with some of the bank failures. Employees at Silicon Valley Bank and Signature Bank had large positions in their company stock before the bank runs.
Keep in mind that employee stock purchase plans are offered at a discount. It could be 10%, 15%… Either way, it’s hard to pass up. But when you build up this large position in your company, two things come into play.
One, the investor will typically have an emotional affinity for the company – because they work there – leading them to hold onto the stock for long periods of time. Some investors might think, ‘If I sell this stock, I’m betting against my company.’
That’s just not true. You have to remember that stock is compensation, just like income is. Executives and employees can sell stock at all different times, for a variety of different reasons. It’s not wrong to sell stock.
Two, like Kayla mentioned, employer stock needs to be considered from an overall perspective. For example, what is the risk, if something does happen to the company? In addition to the pandemic and recent bank failures, there are countless times in history where companies went bankrupt and employees with significant positions lost a lot of money.
We recommend having a strategy in place that specifies when a position reaches a certain percentage of your portfolio, the investor will divest, or sell some of it. There’s no need to sell all your company stock, but it could make sense to do it periodically, perhaps based on certain price thresholds. Having a structured approach helps.
3. Do You Need to Open a New Account to Consolidate Existing Accounts? Or, Do You Need to Open a New Account for a Specific Investment Objective?
The next one is, do you need to open a new account, whether that be to:
- Consolidate existing accounts, or
- Specifically tied to an investment objective
Kayla, can you talk a little about why this is important?
Consolidating Existing Accounts
Part of the reason new clients engage with us is because they have various different accounts they’ve accumulated over the years. We’ve seen cases where one individual has six different 401(k)s and various IRAs open, which they want to merge together.
So, in the process of becoming a client, we assess the various accounts to see whether or not it makes sense to move old 401ks, for example, into one account.
Opening New Accounts
But you should also consider opening an account tied to a specific investment objective, if applicable. Most frequently, investors will open accounts specifically for education costs and for retirement.
For education, a 529 plan is the most popular. A 529 is an investment account that offers tax benefits when used to pay for qualified education expenses for a designated beneficiary. You can use 529 plans to pay for college, K-12 tuition, apprenticeship programs, and even student loan repayments.
In New Jersey, you can deduct up to $10,000 in contributions to a 529 if your household is making less than $200,000/yr.
So, there are certain advantages to contributing to 529s if you know it’s going to be used for education.
For retirement, there are a bunch of employer-sponsored plans like 401ks and 403bs. Those also offer tax advantages. If you know you’re going to use it for a specific goal, like retirement or education, it could be in your benefit to open an account tied to it.
You mention opening up an account specifically tied to an investment objective, like retirement and education costs, but there’s also a behavioral-psychology aspect of doing this, which I want to touch on.
Anyone can open up a separate account for any goal they have, whether the account will be tax-advantaged or not. Whatever you are saving for, separating those funds for that specific goal can help prevent you from raiding the account should an unexpected expense arise.
Separate accounts also help you measure towards your goal(s). You can determine you are, say, 53% of the way to your goal of saving enough to purchase a second home… whatever that goal may be.
And one more point when it comes to consolidating existing accounts: When an investor has multiple 401ks (or similar accounts), it’s very hard to have a cohesive investment strategy.
Pretty often, I’ll see investors using target-date funds in their retirement accounts, which is a fund that is supposed to be tied to the year you plan on retiring. So, if someone is expecting to retire in 2035, they would have a target-date fund for 2035.
But I’ve seen people with target-date funds all over the place – some targeted for 2025, some targeted for 2023, some targeted for 2035 – on top of having a large-cap US stock fund. When we take a deeper look at this, it truly is a mess of investment strategy.
So, consolidating existing accounts can help create a cohesive investment strategy.
4. Do You Hold Assets With a Tax Loss?
On to the next one, which is the question of, do you hold assets with a tax loss?
Yeah, it’s called tax-loss harvesting. This is the timely selling of securities at a loss to offset the amount of capital gains tax owed from selling profitable assets. An individual taxpayer can write off up to $3,000 in net losses annually.
This is a good way for investors to manage their gains per year, and it should be considered when doing an investment portfolio review.
Yes, we saw investors using this strategy a lot last year, because there was a decline in the market which caused people to have losses in their portfolio.
Remember a loss is only a realized loss when you take action to sell it. So, without selling, there’s really no tax consequence. It’s only when you sell it.
Now, a lot of investors don’t consider this strategy, but this is an effective one because not only are you able to take a paper loss, you can actually offset gains from somewhere else – whether that be selling real estate, or other investment gains.
5. Do You Have a Plan in Place For Periods of Market Declines?
The last one we’re covering today is: Do you have a plan in place for periods of market decline? Kayla, this is also timely, considering what we saw in the markets last year. What are your thoughts here?
It’s important to have a plan in place for potential market declines, because it helps prevent an investor from reacting emotionally and selling off . When a portfolio declines, it can be hard to keep your emotions in check. But if you’ve had these conversations with your financial advisor – addressing worst-case scenarios – you are more prepared, and become aware of the benefits of letting the market run its course (while remaining invested).
Absolutely. One of the tools we use to address this is called a Monte Carlo analysis, which runs thousands of simulations on what could happen to your portfolio based on thousands of situations. As an example, it will spit out a report that says, “We’ve looked at 1,000 simulations, and in 900 of them, you’ll still be able to meet your financial goals using your portfolio.”
We know the markets are not going to go up straight every year, and that there are years when it’s up a lot more, as well as years when it’s down a lot more. Monte Carlo simulations can help show an investor that even with down years, they’ll still be able to hit their financial objectives. So, that’s another tool that we use.
Like you said, it’s important to have a plan in place, because the markets are cyclical.
Alright, that wraps up today’s episode. We covered five specific areas to consider during a portfolio checkup. But, as I mentioned, we encourage you to download the full 25-point checklist.
Thank you, Kayla, for being on the show today. And thank you to everyone who tuned into today’s episode. Don’t forget to follow The Agent of Wealth on the platform you listen from and leave us a review of the show.