Think You Need a Portfolio Checkup?
It’s natural as an investor to want to know how your portfolio is performing. Here’s what you need to know before you ask your financial advisor to double check your portfolio.
First, understand that your portfolio isn’t the equivalent of your financial plan. What’s the difference, and why does it matter?
For starters, this isn’t a chicken-and-egg scenario. It’s not a question of what comes first: your financial plan or your investment portfolio.
Your financial plan ideally always comes first, before you invest a single cent or even think about asset allocation or security selection.
Why the emphasis on a financial plan?
Your plan is, in essence, a roadmap that outlines and defines your financial future. It’s a personalized document that you create with your financial planner or wealth advisor, and it includes the details of your financial situation, long-range goals (including those related to investments, retirement, legacy planning, and even lifestyle), and priorities.
Just as important, your financial plan helps define your ability to take risk, an essential part of your overall risk tolerance — and it’s your ability to take risk that will guide your portfolio makeup (i.e., your asset allocation).
Here’s how your financial plan informs your portfolio checkup:
Once you have a solid financial plan in place, and we have an understanding of your current financial picture, along with your long-term goals and your willingness to take risk, we’re in a position to understand what shape your portfolio ought to take.
For example, what percentage of your portfolio should be invested in each of the primary asset classes of stocks (equities), bonds (fixed income), and cash, so that you can reach your goals in your specified time to retirement?
We can even use your financial plan to calculate what we refer to as the “hurdle rate,” meaning the minimum rate of return you as an investor require to accomplish your set of goals and objectives. The hurdle rate is the return needed in order to make your plan successful. Once we know the hurdle rate, we can choose a set of asset allocations that we believe will achieve an expected return greater than the hurdle rate. Understanding your hurdle rate is instrumental in determining your portfolio makeup.
As you can see, it’s impossible to really get a sense of your portfolio’s health without first having a financial plan in place to guide that portfolio. If you’re interested in learning more, and working with our experienced wealth managers to create your financial plan, contact us today.