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Written by: Owen Chambers

Some tasks, while necessary, are close to universally despised. I’ve yet to hear of hobbyist bathtub-scrubbers or vacuum-emptiers, but we (hopefully) all partake in those chores a few times a year. While for those of us at Finity Group monitoring portfolios is second nature, for many investors, routinely checking in on their accounts can feel like pulling teeth (no offense meant to the dentists among us). Ultimately, knowing that hovering too closely over your investments has been shown to have adverse consequences. The most straightforward choice can be to go long stretches without combing through your statements. While I am not advocating for day trading, left unchecked, your investments will not behave as you might like them to. Let’s take a closer look at some potential pitfalls.


For a Customized Portfolio

Whether you put it together from the ground up yourself or with professional help, a well-diversified, customized portfolio appropriately aligned with your goals is where we’re most comfortable seeing most investors. After doing all the research required to put it together, the temptation to rest on your laurels can be strong; if the investment options in your plan don’t change, what’s the harm in assuming that the funds you picked before aren’t still the right options?


One primary issue is that different sectors don’t perform the same way over time. For instance, from 2003 to 2007, emerging markets (developing overseas economies) were the highest performing major asset class, with an average annual return well over 30% (See Callan Periodic Table of Investment Returns below) For long-term investors, some emerging market exposure is usually appropriate. Due to its volatile nature as a sector, we typically aim to mitigate exposure to emerging markets to relatively low levels.

 Callan table

For investors who built their portfolio in 2003 with an 8% target allocation to emerging markets, by the end of 2007, they likely found themselves with a chunk of their distribution well into double-digit percentages in the same sector. Then came 2008 and the Great Recession; in 2008, emerging markets as a category was down over 53%. For investors who had not trimmed that position for several years, this had an inordinately negative impact on their performance. Worse still, for the investors who saw that drop and only then decided to take action (by which I mean divest from those holdings), emerging markets were up over 78% the next year – performance they missed out on joining. 


No one can reliably tell when the next Great Recession or Corona Virus outbreak will occur, nor can they say many years in advance which asset classes will be the worst impacted. In many cases, the best method is a routine trimming of holdings, by rebalancing to a target allocation 2-4 times per year[1]. The inevitable consequence is that you sell some of the investments that have performed best in the last few months, and buy some of the ones that have trailed the field; in essence, you’re forced into buying low and selling high.  


In today’s world, many investors who aligned their portfolios between 2009-2015 and haven’t adequately reviewed them may find that their exposure to large US company stock is much higher than initially intended. While this is historically a less volatile category than emerging markets, that does not mean that we want to allow it to compose much more of our portfolio than our target. 

 Doctor retirement

Target Retirement Funds

One solution to this problem, some investors utilize, is a target retirement fund, i.e., a mutual fund designed to be an all-in-one solution to a diversified retirement portfolio based on an investor’s age. The typical fund has a year in its name, indicating the approximate year an investor would intend retirement to begin. For many investors who don’t have sufficient knowledge or resources, constructing a diversified portfolio can be an attractive option. At first glance, it can be hard to see why they need to be monitored over time, given that the investment company is continuously keeping the allocation aligned behind the scenes.


Fundamentally, the issue is one of communication. There is no line of dialogue between the fund company used and the investor. If your retirement timeline is different from people of a similar age, you may find that the allocation of the target retirement fund is substantially wrong for your goals. For instance, if you intend to retire in your mid-50’s, it’s worth noting that these funds typically assume a retirement age closer to 65. That means that if you are approaching your actual target retirement age, your allocation will be more aggressive than generally desirable. If the market drops sharply in a short period, you will be worse impacted than had you been invested in a more conservative option. 


Conversely, if you have a significant hurdle to overcome before ramping up retirement savings (like a hefty student loan obligation), you may want to keep a more aggressive allocation in place longer. This option could beneficially provide an opportunity to catch up. Even when you leave your balance in a target retirement fund, you need to periodically review your progress to ensure that the timeline is still the most appropriate one.

 Doctor investing

Taking a Deeper Dive

While re-balancing to an original target allocation is a significant step, we need to carry the principle a little further to create an optimal strategy. As when you invest in a target-date fund, we generally need to become more conservative over time to protect your progress. If you’re still re-balancing into an allocation implemented in your early 30’s when you’re 52, it’s time to consider a bigger picture change.


Even when your age is relatively similar, there can be significant value in making forward-thinking moves to change your positioning in light of market conditions or global events. While it’s not as simple as a reactive “buy when it’s rising, sell when it’s dropping” philosophy (which is fundamentally unsound), sometimes based on large scale trends it’s clear we want to put more or less into certain assets than we did a year ago. If you don’t periodically take a closer look at how your balance is allocated, you’ll miss the boat on these opportunities.


Regardless of how simple or complex your allocation may be, or how early or late you are in your track to retiring, periodic review of your portfolio is a must for responsible investors. If you’re anxious about looking at what’s going on, that’s all the more reason to address those concerns head-on; if you need a little help getting there, we’re happy to provide it. 


Investments involve possibility of loss, including total loss of principal.  Diversification and portfolio rebalancing do not assure growth or prevent the possibility of losses.  

[1]This advice applies to retirement accounts and that in non-retirement accounts, this may generate capital gains consequences, so you should speak with a professional before proceeding.

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