Wednesday, 28 August 2013 00:00

“Rightsizing” the DIY Portfolio

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You’re probably familiar with the term “rightsizing” from its common use in corporate America, where it usually describes a situation in which an organization makes changes to the corporate structure, such as reductions in workforce or reorganization of management, with the goal of restructuring the business so it performs optimally. (This process used to be called “downsizing,” a term which has taken on an almost universally negative connotation, and has thus been replaced by the far-friendlier term we’re using here.) What you may not be familiar with is the concept of rightsizing your investment portfolio so that it provides both a vehicle for achieving your financial goals AND giving you security and peace of mind. Rightsizing a portfolio is especially important for DIY investors; if you’re managing your investment strategy without the help of a professional advisor, it really does pay off in the long run to understand how issues like liquidity, asset allocation, and diversification can impact your money, and your security, in both the short run and over time. Below, we discuss several of these topics, and offer practical advice for effectively rightsizing your investment portfolio.


The guiding principle for rightsizing your portfolio should sound familiar if you’ve read any of our other blog posts about the “4 Rs” of DIY investing: careful, judicious, and realistic planning is the cornerstone of putting together a rightsized portfolio. There are many unfortunate stories of DIY investors chasing unrealistic performance benchmarks, putting their money at risk by “getting in over their heads” and over-leveraging their liquidity, or not effectively planning for the fact that different asset classes generally perform differently (i.e., stocks and bonds usually don’t move in the same direction!). We hope that you don’t become one of these unfortunate stories, and we offer the following tips for effectively rightsizing your investment strategy. These are drawn directly from our experience managing our clients’ portfolios, and generally summarize our professional approach to making sure that our clients get the returns AND security they want and need.


Leverage your liquidity wisely

This piece of advice might seem self-evident: invest only what you can afford to invest, given your current life circumstances. Alas, we regularly see and hear of scenarios in which DIY investors over-commit themselves, usually in an attempt at “out-performance,” and run into serious financial issues when their investments underperform (sometimes dramatically) or market conditions fluctuate unexpectedly. Risk tolerance is a focal point of rightsizing a portfolio. Apply a realistic, even conservative, risk tolerance metric to your current liquidity scenario and review and revise it often. As we’ve mentioned before, your investment strategy should be formulated according to your long-term goals, but must be realistically linked to your current station in life. A truly rightsized portfolio begins with knowing that you can afford to fund it without compromising your family’s short-term financial security.


Asset allocation is critical

Generally put, the concept of asset allocation is simply a strategy for deciding which investment products represent the best options for reaching your financial goals and adhering to your risk tolerance threshold. Common asset classes include stocks, bonds, cash, and U.S. Treasury securities. More specific products, like lifecycle funds, bond funds and good old stock mutual funds also exist within these broader categories. Specialized asset classes like private equity funds, real estate, and commodities like gold and other precious metals are also available, but less likely to be a large part of the average DIY investor’s portfolio. Realistic asset allocation is a critical factor in the success of any investment strategy. As the old saying goes, putting all of your eggs in one basket rarely works well; if you lose the basket, you lose all of your eggs! Historically, bonds, cash, and stocks have been the bedrock foundation for most asset allocation strategies, as the relative fluctuations of these asset classes tend to balance each other out quite effectively in both short- and long-term scenarios. Specialized assets can be added to or removed from a portfolio as goals, and markets, change. At ACM, we practice asset allocation stridently, offering our clients diversification across the five major market categories. We can’t overemphasize the importance of understanding asset allocation, and realistically selecting asset categories that match your goals, means, and appetite for risk.


Diversify, diversify, diversify

Most reasonably-educated DIY investors recognize intuitively that portfolio diversification is a “no-brainer.” What many investors don’t realize is that effective diversification takes place at multiple levels. A solid portfolio is diverse at both the macro and micro levels. For example, it’s just as important to diversify within an asset category (i.e., funding both individual equities AND equity funds) as it is to diversify across asset categories (i.e., funding stocks AND bonds). Furthermore, it’s possible to diversify even further within asset classes by focusing on specific markets, industries, and verticals. If your risk threshold permits, you may want to add some specialized assets to the mix. (If this makes sense to you, you’ve probably already realized that this process involves a lot of research. Diversification at both the macro and micro levels helps greatly to buffer your portfolio against the inevitable market fluctuations that come with long-term investing. If you don’t have the time or wherewithal to “deep dive” into diversification, some firms offer products known as lifecycle funds, which target specific investment goals like retirement or college planning and “automatically” adjust diversification strategies over the term of the fund. Lifecycle funds can be effective diversification tools for some DIY investors, but we’ll point out again that adopting a lifecycle fund makes sense only if it’s not an “eggs in one basket” strategy.


Whether you’re just starting out or have been managing your own money for years, it’s never a bad idea, nor is it ever too late, to apply the principle of rightsizing to your DIY investment strategy. If you’d like to learn more about our strategies for rightsizing our clients’ portfolios, we encourage you to contact us to schedule a free consultation today.


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