Reviewing Your Investment Portfolio: How Often Is Necessary?

There is no one-size-fits-all answer to how often an investment portfolio should be reviewed. It depends on the investor's temperament and how much time they want to spend managing their investments. While some investors check their portfolios daily, this can lead to high-frequency monitoring, which may negatively impact performance. Experts recommend reviewing your portfolio as little as possible, suggesting that this could be once a month, every two to three months, or annually. Regular portfolio reviews are crucial for high-net-worth investors aiming to maximise wealth, minimise risk, and optimise tax efficiency.

How often should you check your investment portfolio?

There is no definitive answer to how often you should check your investment portfolio. However, several factors can help determine the appropriate frequency for reviewing your investments.

Firstly, it depends on your temperament and how much time you want to dedicate to managing your investments. Checking your portfolio too frequently can lead to "high-frequency monitoring," which may cause you to feel like your portfolio is performing worse than it is and increase the likelihood of making impulsive decisions. Therefore, it is generally recommended to check your portfolio as infrequently as possible.

Secondly, the frequency of your portfolio reviews may depend on your financial situation, investment objectives, and the volatility of the market. If you are a high-net-worth investor aiming to maximize your wealth, minimize risk, and optimize tax efficiency, regular portfolio reviews are crucial. These reviews typically encompass an analysis of asset allocation, diversification, risk exposure, management expenses, ownership costs, and tax strategies.

For example, at Covenant Wealth Advisors, portfolios are reviewed every couple of weeks to ensure they remain aligned with clients' personal situations. However, for individual investors, checking your portfolio once a month or even every two to three months can be sufficient, as suggested by Ivory Johnson, a CFP and founder of Delancey Wealth Management.

Additionally, significant changes in your personal life can warrant a review of your investment portfolio. This includes events such as winning the lottery, changes in marital status, unexpected inheritance, or sudden health issues.

In summary, while there is no one-size-fits-all answer, it is generally advisable to avoid checking your investment portfolio too frequently to prevent emotional decision-making. Instead, focus on long-term financial goals, and review your portfolio regularly, at least annually, to ensure it aligns with your risk tolerance, financial objectives, and life circumstances.

How to avoid myopic loss aversion

There is no definitive answer to how often one should review their investment portfolio. It depends on the investor's temperament and how involved they want to be in managing their investments. However, experts advise against checking too frequently, a habit known as "high-frequency monitoring". This can lead to impulsive decision-making and a preoccupation with short-term returns rather than long-term success.

• Reduce portfolio monitoring frequency: Research shows that checking your portfolio less often reduces the chance of encountering losses. This, in turn, lowers the emotional stress associated with loss aversion and makes investors less likely to make impulsive changes to their portfolio. For example, reviewing your portfolio quarterly instead of daily reduces the chance of seeing a moderate loss from 25% to 12%.
• Adopt a strategic asset allocation strategy: Rather than trying to time the market, investors should periodically rebalance their portfolios according to a rules-based methodology. This can include constant ratio plans, where the aggressive and conservative portions of a portfolio are maintained at a fixed ratio.
• Utilise formula investing: This involves keeping the aggressive and conservative portions of a portfolio in balance by periodically selling outperforming assets and buying underperforming ones. This approach goes against momentum investing, which follows market cycles.
• Diversify your portfolio: Building a diversified portfolio helps to mitigate market risk factors. By spreading your investments across various assets, industries, or geographic regions, you reduce the impact of losses in any one area.
• Employ smart beta strategies: Using strategies such as equal weight portfolios can help avoid market inefficiencies that may arise in index investing due to overreliance on market capitalisation.
• Focus on the long-term: Investing is typically a long-term endeavour, and short-term fluctuations should not be the primary focus. Try to maintain a long-term perspective and trust the process.
• Use automated investment services: Consider using robo-advisors, which are software platforms that create and adjust your investment portfolio based on your risk tolerance and capacity. This can help take the emotion out of investing and prevent impulsive decisions driven by myopic loss aversion.
• Stick to your investment plan: Develop a written investment plan that includes instructions on how to handle extreme market events and behaviour traps like myopic loss aversion. Refer to this plan when making important investment decisions to ensure you are following a rational and well-thought-out strategy.

How not to check your portfolio

While there is no definitive answer to how often you should check your investment portfolio, experts advise against doing so too frequently. Here are some ways you should not check your portfolio:

Checking Your Portfolio Too Frequently

Checking your portfolio too often, also known as "high-frequency monitoring," can be detrimental to your performance. It can make you more susceptible to rash decision-making and impulsive choices that may not be in the best interest of your long-term financial goals. Research shows that investors who monitor their portfolios too often tend to perceive investing as riskier. This phenomenon is known as "myopic loss aversion," where investors become more sensitive to losses than gains. As a result, they may make emotional decisions that deviate from their initial investment strategy.

Giving in to Temptation During Market Fluctuations

It can be tempting to check your portfolio when there are big fluctuations in the market. However, this can lead to emotional decision-making and potentially increase the risk of losing money. It's important to trust the process and maintain a long-term perspective, making adjustments only when necessary.

Micromanaging Your Investments

Just as micromanaging employees or family members can be counterproductive, so can micromanaging your investments. Financial markets fluctuate, and there will be events beyond your control, such as pandemics or political events. Unless your livelihood depends solely on the stock market, focus on the bigger picture and avoid getting caught up in short-term changes.

Not Adjusting for Risk Tolerance Over Time

Your risk tolerance is likely to change over time, especially as you get older. A portfolio with a high percentage of stocks may be suitable for a younger investor but may be too risky for someone closer to retirement. It's important to periodically reassess your risk tolerance and adjust your portfolio accordingly.

How to practice oversight, not micromanagement

It's easy to get caught up in the excitement of the stock market and constantly check your portfolio, but this can be detrimental to your performance. This habit is called "high-frequency monitoring" and can make you more susceptible to rash decision-making and losing money. Research shows that the more often investors monitor their portfolio, the more likely they are to perceive investing as risky. This is known as myopic loss aversion, where investors become more sensitive to losses than to gains.

To avoid this, it's important to practice oversight without micromanaging your investments. Here are some tips to help you achieve this:

• Set a long-term strategy: Define your financial goals and create a plan to achieve them. This will help you stay focused on the big picture and avoid getting caught up in short-term fluctuations.
• Monitor significant life changes: Instead of fixating on daily market changes, pay attention to significant shifts in your life that may impact your investment strategy. For example, a change in marital status, an unexpected inheritance, or a sudden health issue.
• Review your portfolio periodically: While there is no one-size-fits-all answer, reviewing your portfolio annually or every few months can help you stay disciplined and make any necessary adjustments. This also allows you to maintain a long-term perspective and avoid emotional investment decisions.
• Automate your investments: Consider using robo-advisors, which are software platforms that automatically adjust your investments and rebalance your portfolio without the need for constant monitoring.
• Diversify your investments: Diversification helps to reduce the impact of market volatility on your portfolio's performance. Invest in different asset classes, such as stocks, bonds, and cash, and consider global diversification to reduce exposure to domestic market risk.
• Evaluate risk regularly: Conduct a personal risk tolerance assessment to determine your comfort level with investment risk. As your life circumstances change, your tolerance for risk may also change, so it's important to periodically reassess and adjust your investments accordingly.
• Seek professional advice: Consult financial advisors who can provide guidance and recommendations based on your financial situation and goals. They can help you make more informed decisions and avoid the pitfalls of impulsive decision-making.

Remember, investing is a marathon, not a sprint. By practicing oversight and avoiding micromanagement, you can make more rational and disciplined investment decisions that align with your financial goals and risk tolerance.

How to balance your portfolio

There is no definitive answer to how often an investment portfolio should be reviewed, but there are some guidelines to follow. Firstly, it is important to remember that investing is not an exact science, and there is no one-size-fits-all approach. The frequency of reviews will depend on factors such as the investor's financial situation, temperament, and time they want to dedicate to managing their investments.

That being said, it is generally recommended to review your portfolio at least annually to ensure it aligns with your long-term financial goals and risk tolerance. This is particularly crucial for high-net-worth investors aiming to maximise wealth, minimise risk, and optimise tax efficiency.

Asset Allocation

Diversification is a crucial aspect of balancing your portfolio. By allocating your investments across different asset classes, such as stocks, bonds, and cash, you can manage risk and return. Diversification can be achieved by investing in different types of stocks, such as big, medium, and small companies, as well as global diversification by investing in companies outside of your home country. This helps to reduce the impact of market volatility and lower the risk of losing money.

Risk Assessment

It is important to regularly assess the level of risk in your portfolio. This includes evaluating your asset allocation, diversification, and risk exposure to ensure they align with your financial objectives and risk tolerance. A risk tolerance assessment can help you determine your comfort level with investment risk, taking into account factors like age, financial goals, and investment experience.

Tax Efficiency

Taxes can significantly impact investment returns, especially for high-net-worth individuals. Therefore, it is essential to assess the tax efficiency of your portfolio by evaluating the impact of turnover on your taxes and reviewing your tax strategies. This can help improve your after-tax returns and ensure your investments are tax-optimised.

Expense Evaluation

Review the expenses associated with managing your portfolio, including management fees and ownership costs. By doing so, you can ensure that the fees you are paying are reasonable for the value provided.

Long-Term Perspective

It is important to maintain a long-term perspective and avoid making impulsive decisions based on short-term market fluctuations. Market volatility can be tempting to make emotional investment decisions, but regular portfolio reviews help you stay disciplined and focused on your long-term financial goals.

In summary, balancing your investment portfolio involves diversifying your assets, regularly assessing risk, optimising tax efficiency, evaluating expenses, and maintaining a long-term perspective. By conducting periodic reviews, you can ensure your portfolio aligns with your financial goals, risk tolerance, and tax efficiency objectives.

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