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Good Reasons to Overhaul Your Portfolio

Does your portfolio need a makeover? Here's how to find out.

Key Takeaways

  • It's generally not a great idea to think about a major portfolio upheaval during the market volatility that we've had.
  • Life changes like retirement can be a great catalyst to do a portfolio review.
  • Start with goals when a financial windfall arrives to figure out how to invest the money.

Morningstar director of personal finance and retirement planning Christine Benz wants to help investors make over their real-life portfolios. Submit your portfolio for a chance to have your questions answered and your portfolio reviewed by Christine Benz.

Susan Dziubinski: Hi, I'm Susan Dziubinski for Morningstar. Morningstar director of personal finance and retirement planning Christine Benz has conducted dozens of portfolio makeovers during the past decade. Christine is here today to discuss three key reasons investors may want to make over their portfolios.

Hi, Christine. Thank you for being here.

Christine Benz: Hi, Susan. Good to see you.

Dziubinski: Let's start out by talking a little bit about the market volatility that we've experienced this year. Is that reason enough to really say, "Yes, I need to do a portfolio overhaul" as a result?

Benz: Probably not. I think we're all feeling a little bit frustrated with our investments because we've seen our stocks go down, we've seen our bonds go down. But it's generally not a great idea to think about a major portfolio upheaval in the midst of the market volatility that we've had, the kind of market volatility. I think oftentimes your emotions get involved. I could see investors, especially at this stage, getting into an overly defensive crouch given their time horizons, given their risk capacity. So, I really wouldn't recommend market action as a catalyst. I would try to stick to whatever plan you have and just do your annual check in or your quarterly check in or whatever you do. But I would not recommend making big portfolio changes in the midst of this kind of volatility simply because of that volatility.

Review Portfolio Ahead of Retirement

Dziubinski: Having said that, there are some reasons that you've talked about in the past that there might be times that you would want to make some big adjustments to your portfolio. One of those times is when you're closing in on retirement or facing some other large life change. Why might life changes necessitate portfolio makeovers?

Benz: Sure. And, Susan, we've talked about this before. A huge segment of the portfolio makeover submissions that I receive come from people who are in exactly this life stage, usually anywhere from age 60 to early 70s where they're thinking about the viability of their portfolio and their plan. So, the changes like retirement or whatever big life change you have coming up can be a great catalyst to do a portfolio review. Retirement in particular necessitates a look at whether you have enough to sustain you over your time horizon. And then, from there you can look at the positioning of the portfolio. You know that I'm a big believer in that bucket/time-segmentation approach. Almost any pre-retiree or retiree who reaches out to me and I select them for a portfolio makeover ends up with some version of a bucketed portfolio. I just think that that's such a helpful framework to use when crafting an in-retirement portfolio. You're using your time horizon to guide how you position your assets.

How to Handle a Financial Windfall

Dziubinski: Another catalyst for doing a portfolio overhaul is if you would receive some sort of windfall or a large infusion of cash into your portfolio. What are the key steps to take in that situation and things to be thinking about?

Benz: Well, I think it starts with goals, because individuals' response to a windfall will vary and their planned use of those funds would vary significantly. Someone might say, "Well, I plan to buy a vacation home" or whatever that might be. Well, in that case, you would need to have the money invested very, very conservatively to help meet that short-term purchase. Other people might say, "Well, I plan to add this to my retirement portfolio" and then you might invest it along the lines of however the retirement portfolio was invested. So, it really starts with goals, which in turn gets to time horizon, which in turn I think informs the positioning of the portfolio.

Streamline a Collection of Investments

Dziubinski: And another good reason and something you've certainly seen over the past decade is doing some sort of portfolio realignment if you find that, you know what, I've been a collector of investments, an investment collector, but I don't really have a blueprint for my portfolio. What do you mean by that? And how do investment collectors even go about beginning to streamline those portfolios?

Benz: Right. I will say that we have a lot of collectors on Morningstar.com. In fact, I sometimes hear from readers who say there aren't enough slots for me to have my 500 portfolio holdings here. It's a common conundrum. And this is often an investment enthusiast's problem. The person really is engaged in investments. There might be individual stocks; there might be ETFs or mutual funds. And they've created a plan, but they haven't necessarily had a blueprint for that plan. And I think that can be a phenomenal catalyst, realizing that you've been an investment collector, now it's time to get serious about my portfolio's asset allocation.

Again, it gets back to goals and time horizon, your proximity to needing your money. And from there I think you can take a hard look at the portfolio, and this is something I do when I go through this portfolio makeover process where I do try to salvage good holdings where I find them. If I find good core equity or good bond holdings, I do try to hang on to them. But generally speaking, if I'm working on a portfolio makeover for someone who is an older adult moving into retirement, I try to streamline that portfolio quite a bit. I try to reduce the number of moving parts. So, oftentimes I will cull most of the individual stock holdings in favor of mutual funds, which I think require less oversight on an ongoing basis. And then, you may find that there are some holdings that just belong on the cutting-room floor, either because they're not a fit with your plan, or they're not best of breed and you haven't revisited ratings of your various holdings in a while. I do think that Morningstar tools, Morningstar research can be invaluable as you attempt to work on that winnowing process. That's certainly something that I use as I do these portfolio makeovers. I rely on our analyst team to help signal to me which of these holdings to hang on to and which we can throw overboard.

Work With a Certified Financial Planner or Robo-Advisor

Dziubinski: Depending on the magnitude, an investor might want to work with an advisor to help figure out how to best approach a makeover. Where should they turn?

Benz: A starting point I think is to look for someone who is a certified financial planner. So, they have those CFP credentials. I like the idea of working with someone who is fee-only, meaning that commissions aren't in the mix in relation to any recommendations that they might make for you. And then, also ask if they're a fiduciary. Are they legally required to put your interests ahead of their own? So, tick those three boxes, I think, regardless of what business model you opt for. And then, from there, I would say a key fork in the road and something to think about, and it's very individual specific, is whether you're looking for an ongoing engagement, an ongoing oversight, or you just kind of want that one-time look and then you'll be good to go for at least a while. That will help you figure out if you want that ongoing oversight, then you're probably better off working with someone who will charge you a percentage of your assets on an ongoing basis, and there are a lot of different variations under that umbrella. You could work with a robo-advisor, for example, where you're getting some aspect of digital advice as well as perhaps some human advice. Or you could work with an all-in human advisor, which will usually be a little more high-touch, but also entail a little bit more in costs.

If you want a one-time portfolio review, you can look for an advisor or a planner who works on an hourly basis. Some planners or advisors may be willing to talk to you about kind of a per-engagement contract. So, check around. I often recommend NAPFA.org as a good resource for finding fiduciaries who are CFPs and then winnowing it down a little bit based on specialty, based on whatever fee model makes sense in your situation.

Dziubinski: Well, thanks again, Christine, for your time today. We always appreciate seeing you and talking with you.

Benz: Always love seeing you, Susan. Thank you.

Dziubinski: I'm Susan Dziubinski with Morningstar. And if you'd like Christine Benz to consider making over your portfolio, visit the link on the screen or in the description. Thank you.

Watch "How to Create a Long-Term-Care Plan" for more personal finance advice from Christine Benz.