Wade Pfau, Ph.D., CFA

Building and Maintaining an Investment Portfolio

Building a diversified and effective investment portfolio is an important part of creating an efficient retirement income plan. Much of the research around retirement income planning tends to focus on other matters and not put a lot of weight on portfolio-creation matters. The basic research tends to assume two asset classes (U.S. large-capitalization stocks and intermediate-term U.S. government bonds) and to assume that investors are able to earn the underlying indexed market returns net of fees and rebalance their portfolios right on cue as they proceed through retirement. Of course, there is more to consider with building an effective investment portfolio for retirement. For those interested in learning more on this topic, Bob French, my colleague and fellow writer at Retirement Researcher, has built a new ecourse called, “Investing for a Successful Retirement.”

This course will provide the necessary education to participants to build effective investment portfolios as a part of their retirement income plan. He will provide a framework for you to be able to review your investments as well as your views, attitudes, and knowledge about investing. There is more at stake here than just identifying an asset allocation. The course explains how to determine how well you are positioned to effectively capture market rates of return, how you have practically managed your portfolio in the past, and what are your strengths and weaknesses in investment knowledge or application that could lead to good or poor outcomes. Specifically, issues in Bob’s course include:

  1. Investment philosophy: What is your investment philosophy, and how has it been applied to your portfolio? It is important to have a good understanding of the long-term determinants of market returns based on scientific foundations, not consumer misinformation. Have you paid attention to investment costs and tax efficiency? Have you focused on lower-cost passive investments that support a better chance for success, or have you instead focused on chasing returns and on whatever is in vogue? How informed are you about investment principles, and have you effectively put your knowledge into practice? Have you shifted your mind-set from wealth accumulation to retirement income distribution? Do you have an Investment Policy Statement to help guide your decision-making?
  2. Investment behaviors: How aware and prone are you to various human biases that can negatively affect your investment behaviors? While we may be aware of the proper investment philosophy to have, implementing it in light of our own biases and human tendencies is another matter. You want to acknowledge, to the best of your ability, how your behavioral biases may or may not affect your investment decision-making for retirement income. Does your portfolio have the right level of risk to help you better manage your biases? For instance, are you comfortable with your portfolio and its potential volatility? Can you stick with it during market downturns? Specifically, how did you respond to the financial crisis of 2008? In March 2009 were you still holding on to your stock positions, or had you abandoned them? This is important for determining the right exposure to market volatility with regard to your emotional comfort and ability to implement your knowledge about investing.
  3. Asset allocation views: What are your views on constructing a properly diversified portfolio and your ability to put these views into practice? Although your investment philosophy may cover a wide range of thoughts, you need to know how to put it all together to construct an actual portfolio specifically for retirement income. You want to make sure you are positioned to effectively capture the market rates of return you need through proper exposure of the various sources of investment risk. It is important to have a clear strategy and not just a collection of funds assembled in an ad hoc and piecemeal fashion. Also, are you placing your investment holdings inside the proper account structures to maximize tax efficiency? Do you have any concentrated positions that need to be diversified?
  4. Practical application of investment management: How well can you manage your portfolio on an ongoing basis? This specifically involves the ability to maintain the original intention of the portfolio over time and to periodically adjust the portfolio according to changes in your life. This includes rebalancing, active tax management for asset location and distribution management, assessing style drift, and other factors that slowly creep up and cause unnecessary friction in your portfolio if they are not frequently monitored and adjusted.

Have you addressed tax efficiency with your portfolio decisions? In terms of preparing your portfolio for retirement income, we must consider the cost basis and tax implications of any portfolio changes. This may require a gradual implementation of changes to reduce the tax impact. For tax efficiency, we consider how to best locate assets between taxable, tax-deferred, and tax-free accounts, as well as where to take distributions from in order to best manage taxes.

It is important to get an early start to identify the appropriate market risk factors and build your diversified, low-cost, passively managed multi-asset-class investment portfolio for retirement. Even if your portfolio was set up with proper care in the past, has it slowly evolved and transformed away from what is appropriate for you now? And does it need further refinements as part of the transition into retirement?

Specifically, these are the following seven modules in Bob’s course on investing for a successful retirement:

Module 1: Understanding the Basics

Module 2: Investing Misconceptions (financial media, technical analysis, market timing, performance of investment professionals)

Module 3: Behavioral Finance (understanding human biases that may have helped us survive in the wild, but make us less well-suited to succeed as long-term investors)

Module 4: Investing Concepts (risk, diversification, stock and bond risk factors, investment and retirement risks)

Module 5: Designing Your Portfolio (roles for stocks and bonds, total returns vs. investing for income, international investing, risk tolerance, and asset allocation decisions)

Module 6: Building Your Portfolio (picking investment vehicles, dealing with currently-owned investments, asset location for tax efficientcy, dollar-cost averaging)

Module 7: Maintaining Your Portfolio (rebalancing, fund checkups, tax-loss harvesting, when and why to change asset allocation, creating an investment policy statement)

If these topics interest you, please watch for upcoming additional information about Bob’s ecourse.

Retirement Researcher is a SEC registered investment adviser. The content of this publication reflects the views of Retirement Researcher (RR) and sources deemed by RR to be reliable. There are many different interpretations of investment statistics and many different ideas about how to best use them. Past performance is not indicative of future performance. The information provided is for educational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy or sell securities. There are no warranties, expressed or implied, as to accuracy, completeness, or results obtained from any information on this presentation. Indexes are not available for direct investment. All investments involve risk.

The information throughout this presentation, whether stock quotes, charts, articles, or any other statements regarding market or other financial information, is obtained from sources which we, and our suppliers believe to be reliable, but we do not warrant or guarantee the timeliness or accuracy of this information. Neither our information providers nor we shall be liable for any errors or inaccuracies, regardless of cause, or the lack of timeliness of, or for any delay or interruption in the transmission there of to the user. RR only transacts business in states where it is properly registered, or excluded or exempted from registration requirements. It does not provide tax, legal, or accounting advice. The information contained in this presentation does not take into account your particular investment objectives, financial situation, or needs, and you should, in considering this material, discuss your individual circumstances with professionals in those areas before making any decisions.