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Markets & Strategies

4 Reasons Your Investment Portfolio May Need a Checkup

All investment portfolios require periodic maintenance—especially in volatile times. Is your investment plan on track?

by Mike Woelflein - February 11, 2019

Looking at the performance of financial markets over the last two years provides a study in contrasts. In 2017, almost every asset class benchmark posted strong gains. In 2018, volatility returned and few, if any, asset class benchmarks posted significant 12-month gains. Both cases point to the importance of performing a periodic portfolio checkup.

A portfolio checkup is a review that can help ensure your investment plan is still working to meet your long-term goals, says Chris Haverland (CFA), a Global Asset Allocation Strategist with Wells Fargo Investment Institute. He recommends that investors perform a checkup at least once a year—possibly once a quarter, particularly in volatile markets.

Here, Haverland outlines four key reasons to perform a portfolio checkup and the strategies that can help ensure your investments stay aligned with your goals.

1. Realign a drifting portfolio.

A year like 2017 can throw off your asset allocation mix. Equities, especially emerging-market and U.S. growth stocks, far outperformed fixed-income assets. Left alone, a portfolio that started the year aligned with an investor’s goals—say 60% equities and 40% fixed income—would be out of alignment due to that growth, with a higher allocation to higher-risk stocks. Likewise, in 2018, U.S. stocks held up much better than their emerging market peers, which could make them a higher percentage of a portfolio than they should be.

“A solid investment plan starts with long-term goals, then builds a portfolio to reach for those goals,” Haverland says. “Market ups and downs can throw off that equation. Consider a periodic rebalancing—resetting your allocation to match your plan—to get back to where you need to be.”

“A solid investment plan starts with long-term goals, then builds a portfolio to reach for those goals.”

— Chris Haverland (CFA), Global Asset Allocation Strategist, Wells Fargo Investment Institute

2. Use volatility to your advantage.

Buy low, sell high is the wise investor’s mantra, but it can be easier said than done. Over time, rebalancing generally does it for you automatically: By definition, rebalancing means selling off some very high-performing stocks and investing more in stocks that show more opportunity. “In essence, you are selling high and buying low,” Haverland says. “You’re treating volatility as an opportunity as opposed to a threat, and over time, history tells us that’s usually been the best thing to do.”

3. Avoid emotion-based decisions.

When headlines scream about a market plunge, it can be tempting to make a rash decision to sell. “It’s hard not to let the emotion of a shrinking 401(k) balance push you to deviate from your plan,” Haverland says. Doing so, however, could mean selling at the worst possible time.

Regular portfolio maintenance and periodic rebalancing take the emotion out of the process, preventing investors from making this simple mistake. “You’ve chosen to invest for the long term, to build a plan that’s designed to reach your goals,” Haverland says. And remember: The S&P 500 has averaged better than a 10% annualized return in the 30-plus years since Black Monday (October 19, 1987).1

4. Adjust for changes in your life.

Quarterly reviews of your portfolio can be especially important when life events shift your perspective. Retirement (or nearing it), sending a last child off to college, buying a vacation home, or selling your business could impact how you want to invest going forward. Be sure to take a fresh look at your goals during your portfolio checkup, and review whether your investment goals, time horizon, and risk tolerance may be evolving.

“Think about where things stand in your life,” Haverland says. “Then adjust your long-term plan as necessary to support your investment goals.”

Mike Woelflein is a business and investment writer based in Yarmouth, Maine.

Image by iStock

Additional Resources

Learn a simple strategy that can reduce the risks of emotional investing.

See how you can keep your financial goals on track through various life events.

1Index returns are not fund returns. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.

Portfolio rebalancing does not guarantee profit or protect against loss in declining markets.

Wells Fargo Investment Institute, Inc. is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.