How often should investors review their portfolio?

How often should investors review their portfolio? And, when does it become too much or too little? Researchers have discovered that acting on a schedule with surprisingly long intervals is more sensible, even when transaction costs are low. In other words, excessively fussing over your portfolio is counterproductive, regardless of its affordability.

Diverse Spectrum of Investors

Investors vary widely in their approaches. Some adopt a ‘set and forget’ method, allowing their investments to grow untouched for decades. Others scrutinize their portfolio’s every fluctuation, poised to react at a moment’s notice. However, continuous tampering with one’s investment portfolio has been shown to yield diminishing returns.

Cost of Hyper-Attention vs. Neglect

On one extreme, an investor who constantly monitors their portfolio could maintain an target asset mix but at the expense of time and potential transaction costs. On the other extreme, an investor who rarely checks their portfolio could miss opportunities to adjust their assets and consumption, potentially leading to inefficient cash reserves and missed investment returns.

‘Optimal Inattention’ Period

It turns out, there is an “optimal inattention” period, balancing the cost of time and financial resources. Contrary to intuitive beliefs, a time-dependent observation strategy (at set intervals) generally trumps a state-dependent approach (reacting to market changes), unless costs are prohibitively high. This means investors are better off using a regular interval – say monthly, quarterly, or annually – to determine how often to review and adjust their investment portfolio.

How often should investors review their portfolio?

One study suggests an optimal observation period might be every 34 days, with investors transferring 0.20% of their wealth into their transaction account at each interval. This translates into a 2.14% annualized draw down rate. However, these numbers should be contextualized within the broader economic environment, including interest rates and the value of money.

Passive Investing: A Sustainable Approach

Our family office strongly recommends a passive investment approach. This involves crafting investment policies with a long-term horizon and constructing portfolios that generate enough income without the need for frequent selling. The goal is to allow profits to compound over time.

Steps to a Successful Portfolio

1. Create an Investment Policy Statement: Establish a clear, long-term investment strategy and stick to it. Document your investment policy and share it with your advisors and stakeholders.
2. Invest on a Schedule: Rather than reacting to market fluctuations, maintain a disciplined investment schedule. A quarterly or annual interval might be used based on your circumstances and goals.
3. Review a Portfolio Periodically: Balance the need for oversight with the benefits of “optimal inattention,” such as reviewing quarterly or annually.
4. Avoid Emotional Decision Making: Stay committed to your investment policy, avoiding impulsive decisions based on short-term market movements.

A successful passive investment portfolio is less about constant tinkering and more about strategic, disciplined management. By focusing on these key steps, investors can navigate the complexities of the market with a clear, effective approach. Plus, when we create simple, cost effective, easy to implement, passive approaches to investing, it not only achieves better returns, but also increases our financial peace of mind.

Links for further reading:

1. Embracing Simplicity: The Power of the Buy-and-Hold
2. Buy-and-Hold Investing Forever