When it comes to checking up on your portfolio, a policy of benign neglect is invariably better than too much monitoring. Investors who pay attention to their portfolios' daily fluctuations may become self-flagellating during the market's periodic downturns or congratulating themselves too much when their balances are up.
Worse, too-frequent portfolio monitoring can lead investors to tinker with their portfolios' positioning and holdings more than is desirable or necessary. They might be inclined to adjust their stock/bond/cash mixes based on short-term macroeconomic events, for example, or cash in a fund after a short period of underperformance. Taking a long view is much more helpful. For most investors, a quarterly, semi-annual, or even annual portfolio check-up is sufficient.
With that in mind, here are four additional mistakes – in addition to checking up too frequently – to avoid.
Mistake 1: Basking in the Glow of the Wealth Effect
If you have a sizable stock position and you haven't checked your portfolio's value for a while, it's a good bet that you'll be pleasantly surprised when you look at your balance. Even though stocks have encountered some turbulence in the past month – and interest-rate-sensitive bonds have performed even worse – the past several years have been tremendously placid for both stock and bond investors.
But with enlarged portfolio balances comes the potential for behavioural errors. Investors in the growth stage of retirement planning may think they afford to contribute less, while retirees may feel they can safely take higher pay-outs. In reality, however, higher market valuations mean they should be increasing their deposits and reducing spending. After all, future portfolio growth is apt to come more from investors' own contributions and less from market appreciation.
Smooth sailing for both stocks and bonds can also stoke investors' appetite for risk-taking with their portfolios; equity-market volatility, as measured by the CBOE Market Volatility Index, has recently been quite low. Not only does that make it tempting to let winners run – and leave an ever-growing equity stake unchecked – but investors might also be inclined to build new positions in outperforming but higher-risk market sectors, thereby bumping up their portfolios' volatility potential at an inopportune time.
On the short list of investment types to think twice about adding this late in the cycle are sectors such as small and mid-sized US equities and biotechnology companies which have had a significant rally. In the bond space, investors mulling additions to high-yield bonds should consider whether currently meagre yields are adequate compensation for the risks of the sector.
Mistake 2: Underappreciating Defensive Holdings
In a similar vein, very strong returns from high-risk asset types tend to undermine the case for defensive portfolio constituents, whether stocks or bonds. It's easy to forget the market downdraft of 2008, when many such defensive players more than earned their keep.
Gilts and high-quality low-yielding corporate bonds are the ultimate "what have you done for me lately?" investment; it's easy to overlook their merits as shock absorbers in an equity-market sell-off.
Mistake 3: Getting Lost in the Forest
Morningstar.co.uk’s Portfolio Manager is a terrific resource when checking up on a portfolio, but it's easy to get distracted or overwhelmed by all the data.
When it comes to your portfolio, it's valuable to think big picture. Morningstar's X-Ray tool provides you with many details on your portfolio's positioning, but the most important determinant of its performance will be your total portfolio's asset allocation, which you can select from the drop down menu.
Mistake 4: Not Focusing on Tax-Efficient Accounts When Trading
If it turns out that you need to tweak your portfolio be careful not to trigger any unwanted tax consequences along the way. That's particularly important these days, as many investors have substantial gains in their equity holdings; selling highly appreciated positions in portfolios outside of a tax-wrapper is apt to trigger a capital gains bill.
That means that if you need to reduce the importance of a given asset class, sector, or investment style in your portfolio, you're better off doing so by trimming positions in your ISA. There, you won't face any tax consequences as you reduce the value of your most winning holdings.
This article has been edited by the Morningstar news team to ensure it is suitable for the UK investor audience.
