Portfolio Management is a critical part of your long-term financial plan. There is both "Passive" and "Active" management of your portfolio. Which is better for you? You can't have both and your decision is mainly based upon your risk tolerance. Both can help you achieve your financial goals, but Active Portfolio Management should yield you greater results. These results are based upon making more frequent modifications to your portfolio based upon market conditions, sector and industry trends and economic conditions. We will discuss how this could and should be done.
First and foremost it is important to understand both "Passive" and "Active" portfolio management. The passive approach is based more on the "diversified buy and hold approach". By taking your investable assets and diversifying them across different asset classes such as equities, preferred stock, bonds (corporate and/or municipal), funds, ETF's and possibly Options, you can ride out large swings in the market over time. Typically "passive" portfolio management has more dividend and fixed income related assets in the portfolio since less changes will be made over time.
Active Portfolio management is looking for those critical market and economic conditions that may affect your portfolio and adjustments should be made. If wholesale changes are done to your portfolio, either you were weighted too much in one asset or sector, or the original mix of your portfolio was not done appropriately. With our clientele that want the Active Portfolio management, we review key assets weekly, review monthly performance for possible modifications, but typically will make quarterly adjustments if necessary. If there are significant market and economic changes, we may suggest a monthly adjustment. Again, being active doesn't mean that you need to consistently make changes. The smarter way to build wealth is to evaluate your portfolio from a macro view, not a micro view.
The asset allocation for both "Passive" and "Active" portfolio's varies. The percentage breakouts are determined by diversification and you're "Client Risk Profile" (detailed information gathered by your advisor). Most of the percentage breakouts are also determined by your age and your stage in life. If you are married with children with a decent-sized mortgage, you will probably want to take on "less" risk and look for more yield versus a married couple with no children. They may want to take on more risk and be more diversified in growth stocks and funds. Again, each client is different based upon their current situation and current market and economic conditions.
We are a strong advocate of "compounding". By reinvesting your dividends and not taking capital gain redemptions, you can significantly build your portfolio faster. In some cases there are tax advantages to compounding. Compounding is also less administration for your account and puts you in a situation where you won't feel that you are forced to make an investment decision with that distribution. Of course, if you are at the age where you are in the "distribution stage" with your portfolio, then collecting those dividends and taking capital gains will be fruitful, especially if you have been compounding over time. During the "accumulation phase" of your wealth building, compounding is a critical contributing factor to your portfolio. Of course we recommend adding "free" cash to your portfolio and select investments when you can, but compounding can help you achieve your financial goals without feeling that you "have to add" to your portfolio on a continuous basis. We do recommend that you consistently add to your IRA (or 401k) as often as possible, even if you can max out your annual contribution. If your company has a matching plan, you'll be able to take advantage of the additional contribution. It is additional money you are earning and contributing to your future retirement. Even in your IRA, you should consider Active Portfolio management because by moving from Growth to Bond funds or Growth to High-Yields funds or vice-versa when market and economic conditions warrant the change, you will benefit over time. Again, being "Active" does not mean make frequent changes, but it does mean you need to follow what's going on with the market, economy, geo-political situations, sector and industry trends and your overall financial picture. If you don't have the time and cannot thoroughly do the research required, then don't try to do this on your own.
Over the past few years, with severe market volatility, the old phrase "Buy and Hold" became "Buy and Pray" or "Buy and Hope". But the bottom line, "Buy and Hold", we believed in the past, was the right way to invest. Especially if you bought, or were holding the big cap stocks. A customer once told his advisor, "I'm sending you $10,000. Buy me something and when I'm even sell". This is really the definition of "Buy and Hope" and this is certainly not the advice we provide to our clientele, but it does echo the sentiment of how some people think about the market and investing. The bigger picture with your finances is what needs to be taken into consideration and the thorough process on building wealth over time, not just for the moment.
Surely, the market and the economy have not seen more turbulent times since the 1930's. Nobody can consistently, or even rarely, buy at the bottom and sell at the top. When setting up your portfolio, you must have a plan; a reason to put money in different asset allocations. Part of that allocation can be specific to a particular industry. Many investors believe in sector rotation and have profited well from it, but you need to follow the economic cycles very closely. If you don't have the time, the make sure you diversify in funds that do follow the economic cycles and allocate appropriately.
You should consider preferred stocks, corporate bonds, treasuries or even municipal bonds as part of the regular investments of a diversified portfolio, this not only will provide income it can offer some stability to the portfolio during volatile times. Too many adjustments over time will skew your original intended results and expectations. This is the "main" reason why most people don't meet their financial goals, because investors are doing wholesale changes in their portfolio every few years versus staying with the intended plan and only making minor adjustments and using compounding to your advantage. One of the reasons why several people don't achieve their financial goals is because they panic when they shouldn't and are greedy when they should be prudent. This is just human nature and many times investment decisions need to be more robotic.
Most investors do not have the time nor the inclination to do detailed analysis. That's why they need an advisor they can trust and who has suitability requirements for their clientele and your best interest in mind. A good advisor will go through a thorough "Client Risk Profile", develop a "Life Balance Sheet" and put together an "Investment Policy Statement" to follow as the guideline for building wealth in your portfolio. Be prepared to answer all the questions fairly and honestly. Your information is not only confidential, but critical to making the right investment decisions for you, your family and your business.
About the Author
Ronald Lang is the Principal at Atlas Wealth Management, LLC focused on working with clients to meet and exceed their financial goals through suitability and fiduciary requirements of their clients. Mr. Lang writes several articles on wealth management to educate and provide valuable information to both clients and non-clients. He believes that financial education is one of the most important skills you can have in life, but very few people pay attention to it until its too late. Mr. Lang also does several speaking events and volunteers his time to youth sports. You may contact him at Ron.Lang@AtlasBuildsWealth.com or (888)403-9400.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.