Your investment portfolio isn’t a “set it and forget it” proposition. Regular audits help ensure your investments align with your changing goals, risk tolerance, and market conditions. Auditing your portfolio holdings might sound complex, but we’ll break it down into clear steps to simplify the process and deliver meaningful results.
Why Portfolio Audits Matter
Financial markets are dynamic. Investments often grow at different rates, throwing your portfolio out of balance. Besides the market, changes in your personal life can shift your financial priorities and risk tolerance. A regular portfolio audit helps you:
- Identify potential risks and inefficiencies.
- Align your investments with your current financial goals.
- Implement a comprehensive diversification strategy to weather market volatility.
- Utilize tax-efficient strategies to help increase returns.
- Confirm that you’re not overpaying in fees.
1. Review Your Asset Allocation
The mix of stocks, bonds, cash, and other investments in your portfolio is crucial to consider. This distribution determines how much risk you’re taking on and how much growth you can expect over time.
Begin your audit by comparing your current asset allocation to your target allocation. For instance, if your plan calls for 60% stocks and 40% bonds, and your portfolio now stands at 70% stocks due to market gains, it’s time to make adjustments.
Without regular review, asset allocation drift can expose you to risks you’re not prepared to handle during market downturns. Maintaining a balanced allocation ensures you’re neither overly aggressive nor overly conservative for your goals.
2. Evaluate Investment Performance Metrics
Not all investments perform equally, and some might fall short of your expectations. That’s why you should scrutinize each holding against relevant benchmarks. Here’s how:
- Set points of reference: Compare a stock fund to the S&P 500 or a bond fund to the Bloomberg US Aggregate Bond Index.
- Review timeframes: Short-term dips might not be alarming, but consistent underperformance over three to five years could signal deeper issues.
- Check contribution to goals: Even a well-performing asset is worth revisiting if it no longer aligns with your investment objectives.
3. Rebalance Your Portfolio
Rebalancing is your chance to restore harmony to your portfolio. Beyond reducing risk, rebalancing provides an opportunity to take advantage of market dips by buying undervalued assets. This disciplined approach prevents emotions from driving your investment decisions. Here are some rebalancing strategies to try:
- Calendar-based rebalancing occurs at set intervals, such as quarterly, semi-annually, or annually.
- Threshold-based rebalancing occurs whenever an asset class deviates from its target allocation by a predetermined percentage, such as 5%.
- Cash flow rebalancing uses new contributions or withdrawals to adjust allocations without selling existing assets.
- Tax-smart rebalancing focuses on tax-advantaged accounts to minimize capital gains taxes when selling assets to rebalance.
- Strategic rebalancing is when you time rebalancing decisions to align with market opportunities or other financial events, like a change in interest rates.
4. Analyze Fees and Find Savings
Fees are an often-overlooked drain on your returns. Even a seemingly small fee can erode your wealth over decades. Follow these fee analysis and reduction tips:
Analyze:
- Review expense ratios for mutual funds and ETFs.
- Examine advisory fees if you work with a financial professional.
- Identify transaction fees or hidden charges associated with trades.
Find savings:
- Opt for low-cost index funds over actively managed funds.
- Consolidate accounts to qualify for reduced management fees.
- Negotiate with your advisor or consider fee-only financial planners.
5. Identify Portfolio Weaknesses
No portfolio is perfect, and blind spots can creep in. Just remember—diversity is the key to resilience in all market conditions. Here’s what to look for:
- Sector overconcentration: Holding too many tech stocks? Diversify into sectors like healthcare, energy, or industrials.
- Geographic exposure: US markets dominate many portfolios, but global diversification reduces regional risk.
- Lack of alternatives: Real estate, commodities, and private equity offer non-correlated returns.
6. Reassess Your Risk Tolerance
Risk tolerance is personal and shifts with age, financial goals, and life circumstances. Staying true to your risk tolerance can prevent sleepless nights and hasty decisions during market turbulence. Here’s how to make risk tolerance adjustments:
- Consider your age, knowing that lower risk is generally advised the closer you are to retirement.
- Take a risk tolerance quiz or consult a financial advisor.
- Factor in emotional responses to past market downturns—did you stay the course or panic-sell?
- Match your risk profile to your portfolio’s asset allocation.
7. Consider Asset Location
Where you hold your investments significantly impacts your after-tax returns. Tax-advantaged accounts, such as IRAs or 401(k)s, offer unique opportunities to optimize your strategy. Follow these steps to improve asset location:
- Consider holding tax-efficient assets like index funds or municipal bonds in taxable accounts.
- Consider tax-inefficient assets like REITs or bond funds in tax-advantaged accounts.
- Consolidate scattered accounts to streamline management and help reduce redundancy.
8. Evaluate Individual Holdings
Digging into individual investments is where you might discover hidden gems—or liabilities. Don’t be afraid to let go of investments that no longer serve their purpose, even if it means parting with long-time favorites. Ask yourself these questions for each holding:
- Is this asset contributing to portfolio diversification?
- Has its performance met my expectations?
- Are its fees justified?
- Does it align with my overall strategy?
9. Review Your Investment Team
Are you currently working with a financial advisor? Their advice greatly affects your portfolio’s performance. If you determine your advisor isn’t meeting your expectations, it might be time to explore alternatives. Ask yourself the following:
- Does my advisor proactively communicate about changes or opportunities?
- Do they provide clear explanations for their strategies?
- Are they transparent about fees and acting in my best interest?
Let Prime Capital Financial Guide You
At Prime Capital Financial, we believe in empowering our clients through knowledge and personalized service. We have a diverse team of over 200 advisors across 70 locations, allowing us to combine a people-first approach with the resources of a national firm. Our collaborative style means that when you work with us, you gain access to the collective knowledge and experience of our entire team.
Ready to audit your portfolio with confidence? Contact us today for help refining your strategy and achieving your financial goals.
Disclaimer: Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite #150, Overland Park, KS 66211. PCIA is doing business as Prime Capital Financial | Wealth | Retirement | Wellness. PCIA and its associates do not provide legal or tax advice.
