Mystery portfolio holdings
Published 2:25 pm Friday, May 14, 2010
It’s not uncommon for investors to be periodically reminded to reassess the content of their portfolios—after all, risk tolerance levels evolve, as do financial needs and lifestyle goals.
However, at least in some cases, that advice may be wasted, because studies tend to show that many investors don’t fully know what’s in their portfolios.
Clearly, it’s difficult to make an intelligent assessment of the suitability of a portfolio or an investment strategy if the holder isn’t aware of its current make-up or is content with rose-colored “guesstimates” about its performance rather than solid facts.
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“Cognitive dissonance,” which essentially describes our knack for substituting a convenient perception for reality when the latter seems too painful to acknowledge, may serve a purpose when dealing with private lives and emotional matters.
In savvy financial management, it has no place.
In a 2007 analysis of brokerage accounts of individual investors in Germany, researchers Markus Glazer and Martin Weber found an abundance of overconfidence. Investors overestimated their actual performances by 11.5 percent a year. Only 5 percent acknowledged negative returns, whereas 25 percent actually experienced negative returns.
Portfolios have a pulse
Managing your portfolio requires paying attention to both it and the markets that drive its performance.
Even the most basic portfolios are, like living things, constantly in motion. Values fluctuate, dividend rates rise or fall, bond ratings change.
Your satisfying asset allocation two years ago is almost certainly no longer as you designed it.
Successful wealth builders know it’s not helpful to merely hope that everything will turn out well. Make adjustments when and where warranted on the basis of whether you are comfortable with risk levels and the suitability of your allocations to your financial goals and investment time frames.
You may be happy with the shape your portfolio has taken as it has evolved. But you won’t know that unless you are aware—and remain aware—of exactly what it contains.
I’ll be happy to assist you—just give me a call.
There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices generally rise. Asset allocation and diversification do not ensure a profit or protect against a loss. Investing involves risk and investors may incur a profit or a loss.