Show #394 Airing 7/15/07
Picking the right portfolio holdings are time consuming. But once the research is done, you can take a pass, right? Not so fast... If you want to make sure your investments are playing according to the game plan you created, you need to be ready to update your portfolio playbook on a regular basis. Here to help us tackle the job is our financial quarterback, Jim Lineweaver. Jim is founder of the Lineweaver Financial Group.
Question:If we did our homework when picking our portfolio holdings, isn't that enough? Why can't we go back to playing golf and relaxing once we've invested?
Answer:Many people will make their initial investments, and then go back to their golf game. However, it's important to monitor what you have created so problems won't develop down the road. B. You need to review your holdings at least annually. Not all portfolio holdings are created equally, so you need to do your initial homework. And things change over time, and only by monitoring your holdings will you be aware of the changes.
Question:What changes are you talking about?
Answer:Well, first, you may have made an investment based on the track record of the manager.
You may have selected the portfolio holdings because you didn't want to pick individual assets on you own; you were more comfortable having a professional handle it for you.
Question:So what should we do if a manager changes? Should we follow the manager or stay with the portfolio holding?
Answer:That's a tough question, and there is no definite answer. Studies on manager's departures show some times the performance is hurt; other times there is no significant difference. You need to be aware of a manager change, and then more closely follow that portfolio holding.
Question:What other changes can occur?
Answer:There may be a change in the investment style of the portfolio holding. While the SEC does have regulations on how a manager may invest its assets, it doesn't have any regulations around words like small, large, growth or value in a portfolio holding's name. So while it may be titled value, it may have a large portion of its assets in growth stocks. For example, I looked at a small cap holding recently, and its top holdings were all large cap stocks. A fund manager may change his style, or let it drift to other areas of the market. This is often done to improve the short-term performance of the fund. Are your portfolio holdings investing what you think they are?
Question:What can we do to get a more accurate picture of where our assets are?
Answer:You may want to have your holdings illustrated using an equity style box. An equity style box ignores the name of the holding, and looks at the individual stocks it holds. It is a graphical representation of your holdings in nine different categories.
By reviewing your portfolio holdings from this perspective, you will get a better view of the asset allocation you have in place as well as a better handle on the diversification in your portfolio, regardless of the names, which may not accurately reflect its current holdings.
Question:What else should we be aware of?
Answer:The overlap, or commonality in the holdings of your various portfolio holdings.
You may have different portfolio holdings, with different sounding names, possibly even managed by different managers, but when you look at the top ten holdings you see the same names. You may have two different portfolio holdings that each holds Microsoft or GE.
So, do you have the diversification you thought you had? You do not need to know all of the holdings of each, but it is wise to review the top ten holdings and see if they mirror, or overlap each other.
Question:Can you give an example?
Answer:For example, here we have two different portfolio holdings: one a large cap value fund and one an income fund.
Looking at top five holdings of each, we see that three of the five are the same. So while we think we have diversification, unless we look at the individual holdings we would not have know that 67% of the top 5 holdings were the same.
Question:What can we do?
Answer:Check your portfolio holdings to see if they fit your financial goals, then periodically review and rebalance. There are hundreds of good holdings to choose from if you need to change.
Is your portfolio being true to you, or has it changed its tune? To find out more, give Jim a call.
