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A Portfolio Analysis: Aligning Your Goals with Your Investments

I hope everyone is healthy and has made it through this part of the virus unscathed. It has been a crazy six months for investors. In March, stocks were down by almost 40%. Since then, US stocks have recovered most of their losses.

Bonds, mainly US Treasuries, have done exceptionally well, benefiting from a fall in interest rates as investors rushed to safe investments.

Gold has hit an eight-year high of $1,779 as speculators have poured into what they hope will provide some protection if the virus causes significant economic dislocations.

To keep the recession from falling into a depression, the Treasury and the Federal Reserve instituted enormous programs. So far, they have helped the stock market recover faster than anyone could have imagined and kept us out of a depression.

However, these programs have caused the deficit to balloon to $3.7 trillion and the Federal Reserve’s balance sheet to top $7 trillion.

It is not clear if the Treasury or the Federal Reserve would have the stomach to drastically increase these programs if the economy faced a significant setback.

Surprisingly, even after all this, the stock market is expensive; we usually do not begin an economic recovery with stock prices close to all-time highs. But this is not a typical recession. Conversely, bonds are a less appealing investment with interest rates dropping.

The one somewhat attractive market is foreign stocks. They have underperformed U.S. stocks for over a decade and have recovered less quickly. If you own some and are frustrated by their underperformance, it might behoove you to keep them. If you do not own any, it may make sense to allocate a slice of your U.S. portfolio to them.

Diversification remains investors’ one free lunch. This is a good time to double-check yours, especially if you were uncomfortable with March’s downturn.

Read More: Asset Management

Comprehensive Investment Portfolio Report

  • Holdings Summary – presents the allocation of your current and proposed investments
  • Style Analysis – by U.S. equity, international equity, and fixed income (bonds)
  • Portfolio Performance Analysis – compares the performance of your existing and my proposed investments
  • Fee Analysis – analysis for the current and proposed investments
  • Risk Report
  • Closing comments and items for your consideration.

401k, IRAs, 403b, or Individual Accounts Can All Be Included. We need to discuss what is the best way to get me copies of all your account statements.

Read More: Financial Planning Services for Retirees

Portfolio Analysis
A Portfolio Analysis: Aligning Your Goals with Your Investments

Risk Tolerance

For some individuals, nothing feels worse than seeing their account drop; conversely, others regret losing out on potential gains. Perhaps, the first investor’s portfolio was too hot, while the second’s portfolio was too cold.

FinaMetrica’s® risk profiling system generates a personalized assessment of an individual’s risk tolerance and provides an opportunity to gauge if their current investments are too hot or too cold.

The evaluation is web-based, consisting of twenty-five questions, including eight optional demographic questions. It only takes fifteen minutes to complete. Upon completion, you receive a detailed report that includes your risk tolerance score.

After you receive your score, I can transfer it to FinaMetrica’s® asset allocation mapping system to convert your score to a portfolio. I then use fi360’s proposal report to compare your current assets to the portfolio generated from your risk tolerance score.

Why is Risk Tolerance Important?

Psychologist Daniel Kahneman won the 2002 Nobel Prize in Economics for bringing to light that people hate to lose money more than they like to make money. Aversion to loss is one of the reasons I ask you to measure your risk profile online at FinaMetrica. I would not want you to be holding a portfolio that is 80% stocks, which might lose 30% in a bad year, when your profile indicates that you would sell everything if it dropped even 5%.

For others, the opposite is true. You might need to take more risks to reach your financial goals. As your financial advisor, I need to alert you and give you options (e.g., take more risks, save more money, diversify your investments more). Each client’s risk profile must be respected.

Mutual Fund and Exchange-Traded-Funds (ETFs) Due Diligence

Tim provides a mutual fund and ETF due diligence selection process using fi360. Screening 10,000+ funds down to a couple hundred eligible for use in your portfolio. The process screens for manager tenure, fees, performance, and style.

Tim cross-references his results with fi360’s Fiduciary Score. That Score is an easy-to-use and easy-to-understand method for objectively comparing peer investments and determining their overall appropriateness. It is a ready-made solution for due diligence that can help advisors demonstrate a careful investment selection and monitoring process.

Read More: Certified Mutual Fund Specialist® (CFS®)

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