Portfolio Investing: Do You Know Where you are Right Now vs. Where You’re Headed?

Daniel Fisher |

CEOs do it’ athletes do it; in fact, anyone who needs to be able to achieve a certain level of performance in order to achieve a specific goal constantly assesses where they are in relation to where they want to be. This is to ensure that available resources are being utilized optimally at all time. It may seem OK to overshoot the goal, but if resources are being utilized in the wrong way – too inefficiently, too costly, too risky (or not the right kind of risks) – it will likely undermine the long term prospects of achieving it. And, you certainly don’t want to undershoot the goal because that could be disastrous. A gap analysis, a sort of snap shot of your current situation, will tell you what adjustments need to be made in your plan to get you on track.

Determining Where You’re Headed

For any long-term investment strategy to have the best opportunity for success, it must be based on a thorough assessment of your needs, priorities, investment preferences and your tolerance for risk and portfolio volatility. Goals must be quantified with measurable benchmarks, and, as in the case of planning for lifetime income sufficiency, they must account for actual needs, economic factors, and life’s uncertainties. In essence, that is where you’re headed – that’s your target.

Are You Where You Need to Be Right Now?

Your portfolio strategy should be calibrated to hit your target. But, over the long-term, targets have a way of moving. Strong market moves can shift the allocation of assets out of balance resulting in a mismatch of risk and return orientation. Suddenly your portfolio can be assuming too much or too little risk which can throw you off target. Although this can be addressed through regular portfolio rebalancing, a portfolio gap analysis will ensure your portfolio is still properly calibrated to hit your target.

Portfolio gap analysis helps you determine whether the resources you are applying to meet your investment goal are optimally utilized in all aspects of your portfolio strategy, including:

Asset Allocation: Is your equity-to-fixed income ratio most suitable based on your investment objectives and risk tolerance?

Portfolio Diversification: Is your portfolio properly diversified on multiple levels – across the right number of distinct equity asset classes; across global markets; across the broadest amount of securities?

Equity Risk: Does your portfolio emphasize enough value and small capitalization equities in an effort to increase longer-term return potential?

Fixed Income Risk: Does your fixed income allocation emphasize enough high-quality, short term bonds to dampen overall portfolio volatility?

Investment Costs: Is your portfolio structured in a way to minimize management expenses and transaction costs?

Portfolio Risk Profile and Efficiency: Does the risk profile of your portfolio still reflect your risk capacity and tolerance?

Whether you are working with an investment advisor, or attempting to manage your portfolio on your own, a thorough portfolio analysis should be an essential component of your long-term investment strategy – that is, if you never want to be in the dark about where you are in relation to where you need to go.

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2022 Advisor Websites.