It’s important to know your personal objectives and circumstances as part of sound financial portfolio management

Financial portfolio management involves choosing investments for your portfolio. These selections are based on your investment objectives, risk tolerance, age and personal circumstances.

Portfolio management complements financial planning by helping you estimate how much you need to save, or the investment return you’ll need, to achieve a particular level of income at some future point and adjust your portfolio accordingly to meet this goal.

A few simple steps to financial portfolio management

Start by listing all your holdings on a single electronic file (or piece of paper), and converting their value to Canadian funds. Then you’d separate them by securities type. In particular, you’d want to group your stocks (plus equity-type holdings like REITs) in one section, and your bonds and other fixed-return investments, like GICs, in the other.

Our one-big-portfolio analysis goes a lot deeper, of course. But the balance between stocks and bonds—call it equity and debt if you prefer—is a key indicator. That’s because bonds give you higher stability than stocks in the long term, but at a cost of lower returns than stocks.

Next, you’d determine the economic sector of each of your stock holdings. Then, add up the value of each of your stocks, and the total value of all your stocks. Do that and you can determine how much representation your stocks give you in each of the five main economic sectors—Utilities, Finance, Resources & Commodities, Consumer Goods & Services, and Manufacturing & Industry. This too is crucial.

The Manufacturing and Resources sectors generally expose investors to above-average risk. Stocks in the Utilities sector generally expose you to below-average risk. So do stocks in the Canadian segment of the Finance sector, particularly the top five Canadian banks. The Consumer sector falls somewhere in the middle.

By weighing the balance among the five sectors, you can form an idea of the degree of overall risk in your portfolio.

Next you’d go on to apply our TSINetwork Ratings to each of the individual holdings in your portfolio. Our common stock ratings are Highest Quality, Above Average, Average, Extra Risk, Speculative and Start-up. You’d want to make sure that your stocks are made up predominantly of “Average” or higher-quality stocks that we currently recommend as buys.

We apply our portfolio-analysis technique much more deeply for our Successful Investor Wealth Management portfolio clients, of course. But applying just this much of it puts you far out ahead in understanding how much risk your portfolio exposes you to, and how close it comes to being right for your objectives and temperament.

Effective financial portfolio management

First, invest mainly in well-established companies. When the market goes into a lengthy downturn, these stocks generally keep paying their dividends, and they are among the first to recover when conditions improve.

Second, avoid or downplay stocks in the broker/media limelight. That limelight tends to raise investor expectations to excessive levels. When companies fail to live up to expectations, these stocks can plunge. Remember, when expectations are excessive, occasional failure to live up to them is virtually guaranteed, in the long term if not in the short.

Financial portfolio management: If you want to hold bonds, stick with short-term maturity dates

If you are reluctant to hold a 100%-stocks portfolio—and many people are—then one alternative to consider is to keep a portion of your investment funds in relatively short-term fixed-return investments, with maturity dates of a few months to no more than two to three years in the future.

These fixed-return investments will lose value when interest rates rise, but not enough to make a serious dent in their value. You can hold them till maturity, then get your money back and reinvest.

Financial portfolio management: Rising interest rates would push down the value of long-term bonds

Regardless of age, we advise all investors to stay out of long-term bonds. That’s because long-term interest rates on bonds are still bumping along near 4%, which doesn’t even cover taxes and inflation for many investors.

Heavy deficit spending by governments, coupled with the rapid expansion of the money supply that’s now underway, could cause an upturn in inflation. That would push interest rates up, and push down the value of existing bonds. Bondholders can, of course, get back the face value of their bonds by holding on to them until they mature. But by then, the bonds’ face value will have lost substantial purchasing power because of inflation.

How have you performed financial portfolio management historically? Has it worked for your investing career? Share your experience with us in the comments.