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The Short Answer

Midyear Portfolio Checkup in Five Easy Steps

A disciplined process can help tune out the scary news flow.

The past few months have provided plenty of opportunities to feel alarmed: Still-gloomy unemployment and housing-market statistics, the flash crash, and worries that Greece's woes could prove contagious added up to a pretty scary quarter, one in which the S&P 500 lost more than 10% of its value.

If you're paying attention to the news flow and checking in on your portfolio holdings every day--or worse yet, throughout the day--you may be tempted to trade more than needed. In turn, you may run up high tax and transaction costs, and you're also more likely to chase whatever's been hot recently in the hope that it will continue to outperform. What a terrible way to invest.

A better, and certainly lower-stress, way to operate is to put in place a disciplined process for checking up on your investments--ideally just once or twice a year or every quarter at most. The lynchpin of such a hands-off portfolio-management program is a well-articulated investment policy statement that spells out how often you'll check up on your holdings and what you'll be looking for when you do.

If you don't have an investment policy statement but want to conduct an efficient and effective portfolio review, you'll want to concentrate on four key elements: your asset allocation versus your targets, fundamentals (whether there have been any notable operational changes at your holdings), performance, and taxes.

Observe the following five steps as you conduct a review of your portfolio. Take notes as you go along because you'll want to refer to them as you decide whether to take action.

1. Check up on your asset mix.
One of the most important determinants of whether your portfolio is positioned to meet your goals is your asset allocation--how much you hold in stocks, bonds, and cash. To help get a precise read on how your portfolio is currently positioned, check out Morningstar's Instant X-Ray tool, free to all users of Enter a ticker for each of your holdings (don't forget company stock and cash), along with the dollar value for that holding, then click Show Instant X-Ray. You'll see a pie chart depicting how much you have in each of the major asset classes, which you can then compare with your target allocations.

But what if you don't know how much you should have in stocks (U.S. and foreign), bonds, and cash? If that's the case, check out Morningstar's  Asset Allocator tool to arrive at an asset-allocation framework that makes sense given your own particular circumstances. Morningstar's Lifetime Allocation Indexes, powered by research from Ibbotson Associates, can also help you see if your asset allocation is in the right ballpark.

Once you've assessed your portfolio's asset allocation, turn your attention to how your stock and bond holdings are positioned. Within Instant X-Ray, you can see stock and bond Morningstar Style Boxes (two nine-square grids in the upper right-hand corner of the X-Ray page) that depict the investment styles of your holdings. Although you shouldn't expect to see an even distribution of holdings in each of the nine squares, you do want to take note if the majority of your holdings are huddled in only one or two regions of the style box.

Instant X-Ray also shows you how your stock holdings are dispersed across various market sectors as well as how that positioning compares with the S&P 500 Index's sector weightings. As with style-box positioning, you shouldn't get too worked up about some divergences, but you do want to take note of very big bets--sectors where your weighting is more than twice that of the index, for example. If you need help interpreting whether your portfolio's style and sector bets are notable or not, click on X-Ray Interpreter for a written explanation of what's notable about your portfolio's current positioning.

Finally, click on Stock Intersection, also on the main X-Ray page, to see whether your portfolio is disproportionately skewed toward one or two individual stock holdings. This is a good way to tell whether company stock is hogging a share of your portfolio. (As a general rule of thumb, company stock should take up less than 10% of your total holdings.)


2. Review the fundamentals.
Once you've checked out your aggregate portfolio's positioning, it's time to conduct a quick checkup on each of your individual holdings. At the bottom of the Instant X-Ray page, you'll see links for each of your funds or stocks; click on the links to see a detailed report for each.

Morningstar's Analyst Reports--free to Premium Members--are a quick and easy way to get a handle on the key issues at most prominent mutual funds, exchange-traded funds, and publicly traded companies. Our analysts will also tell you whether they think a security is worth owning.

If you'd like to conduct your own research on your holdings, you'll need to drill down into the data. For funds, take note of any manager changes, strategy alterations, or upheaval at the fund-company level. (A lot of fund shops have changed hands during the past few years.) As you assess individual stocks, take note of price multiples and profitability trends. Premium Members can also see a Morningstar Rating and fair value estimate for all stocks covered by our analysts.

3. Examine performance.
It's a big mistake to focus too much attention on short-term performance, but your quarterly or semiannual portfolio review should include a quick assessment of which of your holdings are providing the biggest boost to or drag on your portfolio's overall return. It's fine to glance at year-to-date performance, but focus most of your attention on the longer-term numbers--each holding's return during the past three and five years relative to that of other offerings within that same category.

Also take note of absolute returns. Which of your holdings have contributed the most or detracted the most from your portfolio's bottom line? Sustained underperformance can be an indication that something's seriously amiss with one of your holdings. But assuming that your rationale for buying a stock or fund is still intact, a spate of weak returns can also provide you the opportunity to add to that holding on the cheap when you rebalance.

4. Scout around for tax-loss candidates.
Given the market's recent drop, there's a good chance that you have holdings that are currently trading well below your purchase price. If you hold these stocks or funds in your taxable account, you might consider cutting loose your fallen holdings and booking a tax loss; you can then swap into a similar security or wait 30 days and rebuy the same security. This article details the ins and outs of tax-loss selling.

5. Plan your next move.
After you've reviewed your portfolio's current status, it's time to plan your next move. It's not likely that you'll uncover a portfolio problem you need to address right away, but you should make sure to schedule a time to rebalance your portfolio. Conventional financial-planning wisdom holds that the best time to rebalance is at year-end, with an eye toward harvesting any losses to offset capital gains elsewhere in your portfolio. But if you'll have more time to focus at some other time of the year--say, earlier in the fourth quarter--by all means do so.

See More Articles by Christine Benz

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