Stick with your investing plan
Your emotions will not thank you for checking your portfolio too often. George Uglow explains why the date of your annual review can have an impact.
Are you guilty of checking your portfolio too often?
Many investors experience a different journey while getting to the same result based on the rolling period of their portfolio review.
Financial planners meet with clients throughout the year – investors may not have reviewed their performance in the interim – and will see different investors experiencing their own journey and emotions, based on the timing at which they are reviewing their returns.
We usually advise that periodic, but not too frequent, check-ins and maintenance of one’s investment portfolio is good practice.
Annual rebalancing back to a target portfolio or generating necessary cash for spending, for example, are times when investors may choose to peek at their investments. Often emotions around investing can be closely linked with the performance observed.
Arbitary periods
Reports of portfolio returns often include arbitrary backward-looking periods that investors are familiar with. Intervals of one-year, three-year and five-year returns are common.
From one year to the next, the one-year return would be entirely new, and the three- and five-year periods lose 12 months at the start and have another tacked onto the end, which can drastically change the overall outcome.
This is a somewhat obvious but important point to remember when reviewing so-called ‘rolling returns’. In the greater scheme of an investor’s horizons, all are relatively short and so subject to market noise and highly sensitive to the period under review.
Consider a scenario with two investors, each reviewing their 60/40 portfolio annually, but in different months: the first investor in January and the second in July.
If we looked at an example data set from the last 70 years, it would show the experienced ‘after inflation’ return of a balanced portfolio over the 12 months leading up to the respective investor’s review.
Both investors would see a negative 12-month return below inflation around 1/3rd of the time, though the experience of each investor would have been, at times, quite different.
Same investment outcome
Having invested over this time period, both investors would have enjoyed a return of 4.3% above inflation.
However, one could have witnessed negative returns just before their annual review with their adviser while the other saw more positive results. However, they both received the same investment outcome.
Lacklustre or negative returns can – understandably – leave investors feeling down, confused or even frustrated with the result.
In contrast, consistent positive returns can lure one into the false sense that markets never take back. They do, and with quite a magnitude.
Having the patience and fortitude to stick with a well thought-out plan and robust investment solution can be a challenging, but ultimately rewarding, part of being an investor.
We should stick with the plan, accepting there will be highs and lows along the way.
George Uglow (right) is a chartered financial planner with Cavendish Medical, specialist financial planners helping consultants in private practice and the NHS