A Quick Guide to Reviewing Your Holdings
Benchmarking performance and watching key metrics are essential to evaluating whether your retirement holdings are doing their job.
Benchmarking performance and watching key metrics are essential to evaluating whether your retirement holdings are doing their job.
Note: This article is part of Morningstar's January 2015 5-Point Retirement Portfolio Checkup special report.
Whether your retirement portfolio consists of dozens of holdings or just a few, from time to time, it's a good idea to assess how each is performing and to take a look under the hood. That's why it's important to know which performance benchmarks and key metrics to use when sizing up each holding individually. In doing so, you should look at both past performance and forward-looking measures designed to provide guidance as to how the investment will perform moving forward. That way, you can determine whether things in your portfolio are humming along just fine, a few upgrades are in order, or wholesale changes need to be made.
Take the Long View on Past Performance
The metric that investors tend to focus on most, of course, is total return, a backward-looking measure. But reviewing a holding's total return versus its benchmark and peer group requires a dose of perspective. For one thing, it's important not to place too much emphasis on near-term results. If a fund you own has performed poorly of late, try to understand why. Perhaps the fund's manager has placed an outsized bet on a particular sector that has underperformed in the near term but is poised to rebound soon. Likewise, don't be lulled into overconfidence by near-term outperformance--today's outperforming investment often becomes tomorrow's underperformer.
Remember that you're investing for a retirement that may be years--if not decades--away, depending on your age. If you're more than 10 years from retirement, you have time to ride out the market's ups and downs. If you're closer to retirement, you may want to ratchet down the risk; but you'll still need to have a good sense of how your holdings may perform once you stop working. Whatever your retirement time frame, focus on your holdings' performance over the trailing five- and 10-year periods, but also pay attention to how they've reacted in different market environments. You could begin your analysis by focusing on 2008, when the financial meltdown sent stock prices plummeting and bond prices higher. But also look at 2013, when stocks posted strong gains while bonds languished.
Using Appropriate Metrics
Of course, your portfolio probably contains at least a few different asset types, meaning you'll need to pay attention to benchmarks and metrics that are most relevant to each type. For example, volatility and risk measures may be more important to you when it comes to your stock holdings, whereas interest-rate sensitivity probably matters more to you with regard to your bond holdings.
The following guide is designed to point you in the right direction when it comes to benchmarking the performance of various asset types and identifying other important metrics to watch. It's by no means a comprehensive list, but it's a good place to start. Metrics can be found on the investment's Quote page unless otherwise noted.
Individual Stocks
Key performance benchmarks
Key forward-looking metrics
Key backward-looking metrics
Domestic-Stock Mutual Funds and ETFs
Key performance benchmarks
Key forward-looking metrics
Key backward-looking metrics
Foreign-Stock Mutual Funds and ETFs
Key performance benchmarks
Key metrics are the same as for domestic-stock mutual funds and ETFs in addition to the following forward-looking metric
Bond Mutual Funds and ETFs
Key benchmark
Key forward-looking metrics
Key backward-looking metric
Last Steps
Once you've reviewed your holdings using the key metrics and benchmarks mentioned above, it's decision time. If you find that some of your holdings are consistently underperforming, or not behaving as you'd anticipated--for example, moving in lockstep with your other holdings when you expected them to zig while others zag--it may be time to make changes. Likewise, if you find, after looking at some of the key metrics outlined above, that your stock or fund isn't delivering what you expected--perhaps it's more volatile or just doesn't fit in with your overall allocation any more--you may want to get rid of it.
But as you review your retirement portfolio, always keep in mind the big picture. Ideally, your portfolio holdings will complement one another and function as a unit. Making adjustments along the way is fine, but avoid the temptation to make changes for change's sake. Repeatedly dumping short-term underperformers and buying today's hot stock or fund is a recipe for long-term portfolio underperformance. So, use the information described here to make smart, well-considered choices. And for more on deciding when to sell a fund, see this video with Morningstar's Christine Benz.