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Portfolio Management

"The key to successful management of your portfolio”, many advisors will tell you, “is an appropriate allocation among different types of investments”. The old “eggs in one basket” story. True as far as it goes, but that’s not quite far enough. Here we propose to deal with some of the other issues not covered by the broad statement above.

As investors, we are all ultimately striving to invest efficiently and in this context, “efficient” means ensuring as best we can in an uncertain world that future potential risk is not excessive when related to potential return. Which is to say that a “downside” of 30% when the “upside” is only 15% is not usually a sound practice (although, curiously, there can be exceptions, but that’s a subject for another day).

So, what are some of those other issues? In fact, the five issues mentioned below – merely a sampling of some things you need to consider - are not totally distinct. In some senses, they represent more or less the same issue, but seen from a different perspective.

1. Correlations: Many people think of their investment portfolio as a “pie”: each piece (asset class) complements another and they all fit together. The analogy falls apart however, rather like an overcooked apple cobbler, when risk is the subject. In a pie, one piece is much like another except in regard to size. In a portfolio, one “piece” should ideally be very unlike another; it should serve to offset the risk of another piece. That’s the problem: too many portfolios are half-baked, so to speak. The pieces, in investment jargon, may be “too highly correlated.” Putting it another way: mid-caps, to take one example, may pretty much behave like large caps.

2. Monitoring: Investment portfolios should always be seen as dynamic rather than static. An appropriate analogy might be to compare them to an auto engine: you need to keep your eye on the gauges and, as appropriate, top up the oil or have the vehicle serviced. In other words, inattention to your portfolio is no option for a prudent investor. This is not to say that we advocate constant tinkering either. That approach will likely do nothing to improve performance and will certainly lead to higher costs. A balanced view is essential.

3. Time Horizon and Evolving Needs: Things change. The world changes and so, inexorably, do our personal needs and circumstances. The makeup of a portfolio must adjust over time to accommodate these changes. Many of the necessary adjustments will be obvious: a large inheritance will surely permit new, complimentary investment strategies; failing health must lead to other choices (hopefully prudent). Some necessary adjustments may be less immediately intuitive. For example, what to do about a substantial IRA, presumably properly diversified, owned by a 90 year old? No easy answers here, but these sorts of topics need reviewing with trusted advisors with some regularity.

4. Realistic Assumptions: Portfolios need monitoring and rebalancing as suggested above. Underlying any possible actions must be assumptions about issues such as – “what kind of return will I get from small caps over the next 10 years?” or “how much can I safely take out of my account on an annual basis?” All assumptions will ultimately be no more than informed guesswork. The challenge is: How to ensure that they are more “informed” than “guess”? There are few solid answers here except to say that too many investors are plainly wrong about their assumptions. At least they are “wrong” in the sense that the large majority of prudent investment professionals would, if given the opportunity, tell them something like “taking 10% out of your portfolio each and every year virtually ensures you will run out of money during your lifetime”. In other words, check your assumptions with someone you really trust.

5. Discipline: Investing successfully takes a certain amount of courage, not of the “blood and guts” variety to be sure, but surely of the kind that one might associate with holding a political opinion that may be unpopular. Successful investing also takes discipline. There are umpteen million “gurus” on the Internet more than willing to proffer their “solutions” to the challenge of financing your retirement, or whatever. It is easy to be side-tracked by these blandishments. However, some things ARE certain in the world of investing. One is that constantly “jumping from horse to horse” in the middle of a race will put you at risk of getting trampled under the hooves. And sooner, rather than later, in all probability. Of course, investment strategies can be changed, sometimes radically, over time. Don’t make the change, however, unless the reasons for doing so are a) clear and b) truly objective.

Whatever advice we might be able to offer you on being sensible about managing your money, it (the management) must ultimately be more pleasure than pain. If it is an uncomfortable duty, you will neglect it just like that exercise regime you’ve been promising yourself. Whether your portfolio is large or more modest you should consider its care and maintenance as a fascinating intellectual challenge. It’s a serious game to be sure and you should play to win. If you approach the challenge with this mindset, we believe the odds are much in favor of your success.

As much as you may enjoy the “game” you may also feel that you would like to have an ally. That’s where we at International Assets may be of assistance to you. One of our senior investment consultants or Certified Financial Planners can review your situation and your portfolio from an objective and informed viewpoint.

Don’t hesitate to call us.