Step Three - Monitoring the Investment Portfolio

On Friday and Saturday we looked at asset allocation models - for the American Association of Individual Investors and Schwab, respectively. Asset allocation models specify targeted percentages of asset classes. They are the framework investors use for investing. The breakdown of the percentage to invest in stocks and bonds is the most important step in the investment process. The model is what we need to be able to stick with as the market goes through its fear and greed cycle. Having the right model is crucial in preventing us from succumbing to the emotional ups and downs of the market.

Yesterday we examined Step Two on how to choose investments. We considered sources of exchange traded funds - iShares and broker commission free funds. We also touched on buying individual securities for the small cap sector.

Today we look at Step Three - monitoring the portfolio. I have seen many investors who have an ad hoc investment process primarily because they don't have a means of monitoring their overall portfolio. They have numerous accounts at multiple brokers that they try to track using spreadsheets. In effect, they are using a paper-and-pencil approach that was appropriate 20 years ago but, IMHO, is cave-era stuff in today's age of technology. What is being done by pencil and paper can more easily and efficiently be done with tools provided by brokers.

To see this, let's extend the example used in the previous posts, mentioned above, whereby we picked a model with the Charles Schwab platform and we've made our investments. Where do we stand now?  This is easily answered by using their "portfolio analysis" tool. Here is a  portfolio relative to its model ("Moderate Conservative") showing the actual percentages relative to targeted percentages: CLICK TO ENLARGE

(Source: Charles Schwab)
 
The beauty of all of this is that accounts can be combined. If you have, for example, a taxable account, a traditional IRA, and a Roth IRA etc., all can be combined and analyzed as one portfolio relative to the asset allocation model you have chosen. Forget spreadsheets and data entry. Once a trade is entered, it is automatically put in its asset class and the analytics are available.

As shown in this table, the "International Equity" sector is below target. By buying the appropriate international exchange traded fund, it can be brought back on target in a matter of minutes. The seasoned investor will quickly see the utility for rebalancing purposes.

Note that the discrepancies can easily be viewed in dollar amounts, which is useful in quickly calculating the number of shares to buy or sell.

Another important part of monitoring portfolios is performance. Schwab provides performance up to the previous trading day for various time periods along with the performance of the benchmark: CLICK TO ENLARGE

(Source: Charles Schwab)

I believe that at least 80% of retirement money should be indexed using low-cost index funds. For those, however, who want to try to beat the market with up to 20% of their investable assets, the performance analytics are highly useful. All they need do is segregate their "play account." Then they will have the performance of their "play account" relative to whatever model they want to choose (including the "Aggressive" model which is 95% stock). It won't take long to see if you're the next Warren Buffett!

With these three steps--choosing a model, selecting investments, and monitoring a portfolio--those willing to make a small time commitment can become a DIY investor and keep a great portion of their nest egg  instead of handing it over to high-priced advisors. Voluminous, unbiased research shows that at least 75% of professionals underperform the market, after fees, over longer periods of time.

For those interested in additional detail , I recommend:

Other more advanced recommended books can be found at the "RW Investing Bookstore" link on the right.

Disclosure: I am not affiliated with Charles Schwab, although I do recommend to clients and potential clients that they consider switching to Schwab because of their excellent analytics.