The Three T’s of Portfolio Management

Photo courtesy of SuperUbO via Flickr under Creative Commons License.

Do you have what it takes to manage your money?

To successfully manage a portfolio – any portfolio – you need to possess the “three T’s” : time, temperament and training.

TIME

Isn’t time always the bottleneck? You can’t be a successful investor without committing a certain amount of time to the task. If you’re already thinking in the back of your mind that you’ve been neglecting your portfolio, then time is probably the “T” that will continue to trip you up.

I’m not talking about having enough time to scour the Wall Street Journal daily or read mounds of economic research on weekends. You do need to devote a small amount of time, consistently, to your portfolio.  The key word here is consistently. Managing a properly diversified portfolio should require less than 5 to 10 hours each year while you’re still working.

You heard me right – just a few hours each quarter at most. You need to rebalance your accounts quarterly, making sure the total portfolio remains consistently invested according to your plan. New money going into an account, like your 401k, may change the mix, as will the regular ups and downs in the markets. Studies have shown that regularly rebalancing a portfolio can add as much as 1% in extra return in the long-run. But, you have to attend to the portfolio regularly and consistently if you want to realize this benefit.

Good intentions won’t rebalance your portfolio.

Once you’re retired, managing your portfolio can become a bit more time-consuming, because now you’re withdrawing money from your accounts for your living expenses. Managing your cash flow and deciding where to take the money from can add an additional layer of complexity. Even so, it’s something you can easily accomplish without taking time away from your family or hobbies.

By the way, there are people who have the opposite time issue, and managing their portfolio has become their hobby, or even their obsession. If you are one of these people, then consider whether it’s worth the cost in terms of the time away from your family and friends.

TEMPERAMENT

What exactly do I mean by temperament?  You have the right temperament if you can approach your money in a calm, logical and systematic way. You should not be managing a portfolio if you love gambling on a new stock or if you’re terrified of an imminent economic collapse. Those emotions can cost you dearly.

Successful investing requires an approach that is purposefully designed to reduce or eliminate emotional decisions.  Fear and Greed are the profit centers of Wall Street. It’s how the big banks and brokerage firms make their money. Your job as a successful investor is to avoid the emotional traps that can harm your portfolio.

The most important thing to remember is that investing for your retirement should not be a game – it’s not about hitting home runs and “winning.” Investing your family’s life savings should be focused on protecting your wealth. It should be about making wise decisions with regard to the risks in your life and the return you can realistically expect from stock markets.

Finally, it’s wise to consider the temperament of the portfolio manager in your household. Although men are more likely to be the spouse responsible for investing decisions, women have been shown time and time again to be better long-term investors. They make fewer changes to their portfolio, take less risk and have less attachment to their past investment choices.

TRAINING

The third trait is probably the most challenging – training. You don’t need an MBA to be a good investor, but you do need to be fairly proficient with math and have a reasonable interest in economics and finance. Again, this isn’t rocket science, but some basic financial literacy is a good idea when directing your life’s savings.

The first thing you need to know how to do is select your desired percentage of stocks and bonds. Considering your risk tolerance and your financial plan, should you have 60% stocks? Or 50% stocks? Or maybe 70% stocks?

Your allocation to stocks is the single biggest factor influencing your portfolio return, so you need to get this right for your particular financial plan.

You’ll also need to know enough to build a portfolio using 8 to 12 different kinds of funds for each asset class in the portfolio. This process is called asset allocation.

And then there is the question of asset location:

  • Should the Real Estate fund go in the IRA or a taxable account? (the IRA)
  • How about small stock funds, where do they go? (probably the taxable account, but it depends on your tax rate)
  • Inflation Adjusted bonds? (again, the IRA)
  • Etcetera

You get the idea – location matters. Some researchers have argued that proper asset location and tax awareness can add 0.5% to 1.0% annually in extra return.

Time, temperament and training. You either have them or you don’t. And if you don’t, it’s time to get some help.

Do you have what it takes? We help residents of McKinney, Frisco, Allen and the surrounding areas in North Texas manage their portfolios as part of a comprehensive financial plan. Please get in touch for more information about how we can help you gain peace about your financial future.

 

Photo courtesy of SuperUbO via Flickr under Creative Commons License.

Leave a Reply

Your email address will not be published. Required fields are marked *