Portfolio checkup, strategies, & performance | Investment plan | Fidelity (2024)

Have stock market swings motivated you to check your balances more frequently? It’s important to check your investment plan periodically, but particularly if your goals or situation changes, or after sharp market moves. That way you can check if your mix of stocks, bonds, cash, and other investments is still aligned to your goals, investment time horizon, financial situation, and tolerance for market declines.

Assuming you already have an investment plan in place, here are 4 ways to make sure you’re on track. If you don’t have a plan, why not get started now?

1: Plan for the future

The purpose of a portfolio checkup is to make sure your investments are still in line with your goals, investment horizon, financial situation, and risk tolerance. If they are, great; if not, it’s time to make adjustments. That's why it is critical that you start with a plan that includes clear goals.

If you are still saving toward your goals, you can make plans about strategic ways to put your money to work. If you are living off your investment portfolio, you can evaluate the income potential of your holdings, or how much you may need to sell to meet your income needs. You may want to direct new investments to the most attractive securities or funds in underrepresented asset classes.

2: Evaluate your asset mix

Your checkup is a great time to reconsider your mix of stocks, bonds, and cash. As a starting point, check to make sure that the target you've set matches your risk tolerance, financial situation, and time horizon.

If you haven't reviewed your portfolio for a while, there is a good chance that relative market performance of asset classes has changed your investment mix, causing your combination of stocks, bonds, and cash to drift away from your plan. At times, that can mean too much stock—and risk—or too little. With too much risk, you may experience larger losses in a market downturn than you are comfortable with. With too little risk, you may give up growth potential.

If you have experienced major life changes, you may also want to adjust your strategy and target asset mix. For example, getting married may mean you want to consider your asset allocation as a couple, versus 2 separate individuals. Having a baby may mean you want to devote more money toward a college savings and investment plan. Getting a new job might mean adjusting for more stock awards from your employer. Planning to retire might mean dialing back your allocation to stocks and building a retirement income plan.

During your review, ensure that you are diversified within each asset class. Among individual stocks and stock funds, for example, your holdings could include a mix of investments in each of the following categories:

• Size: Consider stocks of small, medium, and large companies, because different-sized companies tend to lead the market at different times.
• Style: Different investment strategies, such as growth and value, tend to trade market leadership. Holding both types means you can help minimize volatility in your portfolio, and potentially benefit in all types of environments.
• Sector: You may want to include investments tied to many different parts of the economy.
• Geography: You may want your portfolio to include exposure to domestic and international stocks, including those from emerging markets. Financial markets around the world respond differently to regional and global events.

Your bond and bond fund holdings can be diversified within the following categories:

• Sector: Consider investing in various types of government and corporate bonds.
• Maturity: Bonds of different maturities provide diverse levels of yield and interest rate risk. Choose to diversify, or target maturities that make sense for your strategy.
• Credit quality: Bonds of different qualities may perform very differently as the business and credit cycles evolve. Make sure your mix of credit quality offers an appropriate balance of risk and reward for your goals and financial situation.
• Geography: Consider holding both domestic and foreign bonds, possibly including emerging markets debt, to gain exposure to the opportunities and spread out the risks offered by various regions.

Keep in mind the risks associated with the different types of holdings, and remember that just creating a diverse mix isn't enough. Part of your monitoring process needs to make sure that your individual investments remain in line with your plan and to adjust them as necessary. For instance, a small-cap portfolio can grow to become mid-cap, or a period of high returns in one region of the world can leave you over-exposed to the fortunes of that part of the market. That's why it is important to keep careful tabs on how your mix changes over time.

3: Review holdings

While keeping the overall diversification of your portfolio in mind, you can consider making adjustments to stocks, bonds, mutual funds, and exchange-traded funds (ETFs). The answer to the question of what to sell and where to reinvest will be different for each investor. That said, the following principles can help you determine where to make adjustments that fit your personal goals.

Start with any individual stocks you hold. Check whether the companies have performed up to your expectations, and consider whether your outlook for them remains positive. Also review the stock's valuation, to make sure it is still reasonable. A long run-up in stocks can cause valuations to grow beyond the level you think is appropriate. The following measures can help you decide whether a stock remains a good candidate for your portfolio:

• Fundamentals: Check essential business metrics such as earnings and sales numbers, as well as stock valuation measurements such as price-to-earnings and price-to-book ratios, and compare them with the company's peers.
• Analyst opinions: Market analysts' projections can help you evaluate the firms' outlooks.

If you have individual bonds in your portfolio, you should include a review of your holdings in your checkup. For corporate bonds, company fundamentals and analyst opinions can also be useful. For all types of bonds, be sure to review:

• Credit rating: Check to see if the ratings of your bonds have changed. If analysts have downgraded any of your holdings, it may mean your portfolio has taken on a higher level of risk.
• Duration: As time passes, the duration of your bond holdings will fall—meaning your portfolio may become less sensitive to rate changes. You should review this in light of your changing investment goals and the interest rate environment, and take it into account if you are reinvesting in bonds.

When it comes to individual stocks and bonds, you may want to make sure you don't have too many of your eggs in one basket. In general, Fidelity believes you should avoid having too much of your money in any one investment: You should consider reviewing any stocks or bonds of a single issuer that exceed 5% of your overall portfolio. Don’t forget to check on your company stock awards as well, as it can add up to a significant amount if you’re granted shares regularly.

Next, evaluate the performance of your mutual fund and ETF holdings relative to their peers. Consider the following:

• Benchmarks: Each mutual fund or ETF in your portfolio can be compared to a benchmark to determine whether its performance is in line with its stated strategy and goals. It's also important to evaluate the level of risk taken to achieve that return. Each fund's prospectus lists the index that the fund's sponsor deems most appropriate to use as a benchmark. Use these benchmarks to identify and monitor laggards.
• Fund documents: Annual reports and other fund filings are filled with important information. Check whether the fund has brought on a new manager, changed its investment approach, adopted a new benchmark, increased fees, or made other significant changes.

4: Assess overall performance

Your checkup should include an assessment of your portfolio's overall returns. You should check in at least annually, if not more frequently. When evaluating performance, context is key. You need to know 2 things: whether your portfolio is on pace to meet your goals, and whether it has performed as well as comparable investments over a reasonable period of time.

If your portfolio's performance has fallen short of your needs over a long time period or if you find you cannot tolerate the volatility of your investment mix, you may need to revise your strategy, perhaps by saving more or revisiting your investment allocation.

You also want to see how your individual investments have performed. Your first instinct may be to look at the bottom line—we all want to see the value of our investments rise. But what may be more important is that your investments perform in line with your strategy. For instance, an aggressive investor looking for growth should expect to see periods of large gains and losses aligned with the performance of the stock markets, while a more conservative investor would want to see less volatility.

To make a meaningful comparison, check the returns of your stock, bond, and cash holdings against benchmark indexes that are appropriate for each. The exact benchmarks to use will vary based on your particular strategy, but here are a few examples:

• US stocks: The Dow Jones US Total Stock Market Index^SM measures the performance of a broad range of US stocks.
• International stocks: The MSCI All Country World Index (excluding US) measures the performance of stocks in emerging and developed markets outside the US.
• Bonds: The Barclays Capital US Aggregate Bond Index measures the performance of investment-grade bonds traded in the US.
• Short Term: The Barclays Capital US 3-Month Treasury Bellwether Index captures the return of Treasury bills with maturities of less than 3 months, a useful proxy for cash accounts.

Using benchmarks will give you a snapshot of your portfolio's performance relative to the market. Ideally, you want your returns to be close to, but (hopefully) exceeding, the relative benchmarks and exhibiting a level of volatility consistent or lower than those benchmarks. Returns that differ dramatically from the benchmarks—on either the high or low side—may indicate that your investment portfolio may need a review to understand what is causing the difference. And it is important to note that most investors are in it for the long haul, so don't let short-term performance weigh too heavily in your decision-making.