The Importance of Portfolio Monitoring

The Importance of Portfolio MonitoringA fire pit and portfolio monitoring.

I recently completed a backyard renovation project of building a fire pit and seating area where an old tree stump had been. I wanted to have rocking chairs around the fire pit, so I decided to use stone pavers for six designated spaces. After clearing and prepping the ground, I began the tedious task of placing the pavers, one by one, in a distinct pattern for each rocking chair spot.

This process was tedious because I had to make sure each individual paver was completely level. To do this, I placed each paver one at a time, measured it for being level, adjusted the amount of sand underneath, re-measured, adjusted the amount of sand again, re-measured, then repeated the process for every brick in all six spots. I was struck by how much of a difference a pinch of sand here and there made in getting each brick level. The small adjustments of the amount of sand, then consistently checking to ensure each brick was level, made all the difference in finishing my project to a satisfactory level.

I couldn’t help but think of the parallel between the process of painstakingly laying pavers and the process of continuously monitoring an investment portfolio and making incremental, opportunistic adjustments.

As a client of The Retirement Planning Group, you’ve heard us say that we employ the simple strategy of selling high and buying low. But, periodically we will hear: “Why are you selling what’s performing positively and buying what’s currently performing negatively?” Our rationale? Because the investment classes that perform positively or negatively during any given period unpredictably change, and we do not want to predict the randomness of investment class returns.

Over the past few years, this question has been posed in particular about emerging market investments. Emerging markets are companies and consumers domiciled in southeast Asia, India, and South America. For the last several years, this investment asset class has not performed well. However, over this past year, emerging markets investments have been one of the top-performing classes.

This is the perfect example of the benefit of utilizing a globally diversified portfolio and simply selling high and buying low. Leading up to this year, while emerging markets were performing poorly, we made the conscious decision to strategically buy into them. That discipline has benefited our clients.

Just like the process of getting the brick pavers placed correctly, continuously monitoring each asset class within a portfolio is important. We make incremental adjustments along the way, then check, re-evaluate, and repeat the process to make a significant difference in portfolio values.

If you have any questions or follow-up thoughts about portfolio monitoring, please contact your advisor. And hopefully, you’ll get to enjoy some time by a fire pit this fall!