Warren Buffett declared, ‘Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.’ This quote encapsulates his view that Investing is a long-term endeavour. Most investors stray from this long-term outlook and their returns suffer as a result.

Nobody invests in a vacuum. Buffett’s sentiment about the market being closed for 10 years is a nice quote but it isn’t the reality. Investors get constant feedback in the form of price changes.

There are several reasons why investors can’t maintain a long-term orientation, but a primary driver is the approach taken in monitoring their portfolios. The typical investor will frequently check price changes on individual holdings without any context to assess those price changes.

The typical investor also doesn’t have the context of understanding the return needed to achieve their goal. The typical investor doesn’t understand why certain holdings are experiencing price changes. I’ve outlined an approach for monitoring your portfolio so you can do better than the typical investor.

Establishing the foundation to monitor your portfolio

The context to a portfolio review is what you are trying to achieve by investing in the first place. That means defining your financial goal and understanding the return needed to achieve your goal.

Having a set check in point with clear goals reduces the chances of poor behaviour. If you have a structure around portfolio monitoring and maintenance, it is less likely that you are going to trade based on market volatility or uncertainty. This is one of the biggest detractors of investor returns.

Without structure, investors often fall into the trap of focusing on portfolio performance against broad market indices and become overly fixated on short-term market movements. I encourage investors to focus on long-term objectives, and how investments are supporting or detracting your efforts to achieve a structured financial goal.

Let’s illustrate this with a hypothetical example that illustrates the process that I go through to evaluate my portfolio. I’m five years into a ten-year goal that I’m working towards. I need to achieve a 6% p.a. return to get there. The market has returned 8% p.a. over the last five years, and my portfolio has achieved a 7% p.a. return.

Many investors would be disappointed that the portfolio has not beaten the market return. It is likely they are measuring success against this arbitrary benchmark. In reality, this portfolio has done its job. It’s on track to help you reach your financial goal. A structured investor will realise they are still on track. An investor with no context may trade based on this result.

How to monitor and evaluate your portfolio

Portfolio monitoring does not need to be a complex task. Below are the main tasks during the process.

Know how often you are going to review your portfolio

The right cadence will depend on your own circumstances. Some people prefer yearly when they receive their annual statements from their investments and are filing their tax return. This may also reduce poor behaviour as they are not looking at their portfolio regularly.

One trigger for a review of your portfolio and investment strategy is when there are major changes to your life or financial goals. For example, if you get a significant pay rise that means you are able to contribute more, you receive an inheritance, or you lose your job and can’t contribute to your investments for a certain time period.

I prefer half-yearly. I prefer this cadence because I use a mid-year review to collect all of my annual statements and have a comprehensive view of my financial position. I use my second review at the beginning of the calendar year to reflect more deeply on the year ahead and whether there are any changes to my goal or circumstances, as this is often when I also have my employment reviews. Your cadence will depend on your circumstances and what works for you.

It is likely that you will look at your portfolio more frequently than I’ve suggested. This behaviour is understandable, but use the more formal reviews as the impetus to make any major changes to your portfolio and investment approach.

Have your circumstances changed?

Remember that investing is about you and what you want to achieve. It is not about the investments you hold. That is why the first step is to review your own circumstances. Do you earn more or less and are therefore saving more or less? Have there been unexpected expenses? Review how any changes in your life may impact your investment strategy.

Compare your portfolio performance against your required rate of return

At Morningstar, we are proponents of a goals-based investing philosophy. This means that your goals are at the centre of your portfolio instead of an arbitrary benchmark. As I outlined in my previous example compare the return you need to achieve your goal and your portfolio performance.

Take stock of your asset allocation, and whether it needs to be rebalanced

Part of the purpose of having structure in your investing process is to understand the asset allocation you need to achieve your goals. This is intrinsically linked to the required rate of return for your portfolio. If you only need a 3% p.a. return, your portfolio would be tilted towards more defensive assets. If your required rate of return is higher you would have more growth assets like shares.

When evaluating your portfolio compare your target asset allocation with the current asset allocation of your portfolio. This will form the basis for a decision around rebalancing.

There are two theories around rebalancing. The first is that you pick a set interval. For example, you might choose annual. You look at your portfolio and get it back aligned from an asset allocation perspective.

The second theory is that you instead use tolerances. You may set a 10% tolerance which means that if your goal is to have 60% allocation to equities and it gets to be more than 66% you would rebalance. Another version of this is choosing a range. You may have a goal that stipulates that you have 60-80% allocation to equities. In both these cases you are trying not to do it too often as your portfolio will naturally fluctuate.

The reason that you don’t want to do it too often is because rebalancing has a downside. There are transaction costs and there are likely taxes as you sell things that have gone up in value.

Assess whether your required rate of return has changed

Your required rate of return will need to be recalculated periodically. Your investments may have performed very well, and it could mean that you are ahead of your goal. You may choose to reduce risk in your portfolio. If you are not on track to meet your goal, you may choose to invest in more aggressive assets.

It is important for long-term investors to understand that missing your required rate of return in one period doesn’t necessitate change. Markets will always be volatile, and you may be in a period of poor performance. It is important to assess whether a longer period of underperformance or overperformance necessitates a change to reflect this.

Final thoughts

Portfolio monitoring is an essential part of investing, but it must be done with structure and discipline. Rather than focusing on short-term performance, align your reviews with your long-term goals, check asset allocation periodically, and rebalance only when necessary. This approach ensures you remain on track while avoiding costly mistakes caused by overtrading and chasing performance.

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