Portfolio Evaluation Issues for High Net Worth Investors

Regardless of age or size of the portfolio, all investors should be reviewing and evaluating their investments on a regular basis. Especially for high net worth investors, regular portfolio evaluations are important due to the size of their portfolios, and the potential complexity of their overall financial situations.

Often, high net worth investors depend on their portfolio to fund a variety of financial objectives. Even with a down year for the markets in 2018, investors have experienced a long bull market since the market bottomed in early 2009. Here are a few issues for high net worth investors to consider in working with their financial advisors to evaluate their investment portfolios.

Target Allocation vs. Actual Allocation

Over time, movements in the stock market can throw an investor’s asset allocation out of whack. As an investor, you might be taking on too much or too little risk compared with your risk tolerance, goals and time horizon.

For example, let’s say your target asset allocation was:

• Stocks 60%
• Bonds 30%
• Cash 10%

A strong rally in the stock market might leave your portfolio looking like this:

• Stocks 72%
• Bonds 21%
• Cash 7%

This allocation carries a higher potential for downside risk when the markets correct themselves.

High net worth investors should be especially conscious of this given the size of their portfolios. Review your actual asset allocation versus target allocation on a regular basis, at least annually or semi-annually, to ensure they remain on track with your goals and risk tolerance.

Evaluate Your Individual Holdings

While your asset allocation is a key component in determining the right financial strategy for investing, implementing the right asset allocation will involve choosing the right investment vehicles. These might include individual stocks and bonds, mutual funds, ETFs or others.

It’s important to review and evaluate your individual holdings periodically to determine if they're still a good fit. In the case of mutual funds and ETFs, how does each compare in terms of relative performance to your peer groups? In other words, how do your funds compare to funds with a similar investment style? If your holdings include a fund or ETF that is in the small-cap growth category, how does the fund compare to other funds in the category? How does it compare to a representative market index in that category? For high net worth investors, this might be a complex process, as there are often a number of different holdings across various accounts.

A Total Portfolio Focus is Important

This comparison—the appropriate benchmarks—is important both on an individual holdings basis as well as an aggregate basis for your entire portfolio. Straying too far from an appropriate aggregate benchmark for your portfolio can be costly in terms of your long-term return.

At the portfolio level, a blended benchmark needs to be created. This benchmark will be a weighted average of various index benchmarks that correspond to the types of holdings in your portfolio, relative to their weighting in the portfolio.

For example, the S&P 500 index is a popular benchmark for large-cap U.S. stocks. In addition to large-cap domestic stocks, your portfolio might include holdings in asset classes such as:

• Mid Cap stocks
• International stocks
• Bonds
• Cash

These and other asset classes will have index benchmarks that are representative of the performance of these asset classes.

Your financial advisor should conduct this type of portfolio benchmarking analysis on a regular basis to include both individual holdings and your overall portfolio. Beyond benchmarking portfolio returns, the evaluation should include an analysis of the portfolio’s relative risk compared to the appropriate blended benchmark for the overall portfolio.

Consider Asset Location

In reviewing your asset allocation it’s important to take a total portfolio view, including retirement and non-retirement accounts. Evaluating only your retirement accounts or only your taxable accounts in a vacuum can provide a distorted view of the investment risks you are really taking with your portfolio.

As part of your portfolio evaluation, asset location between tax-deferred and taxable accounts should be considered on a regular basis, as it can have a big impact on your tax planning strategy. While taxes should generally not be the driving force behind portfolio decisions, being tax-smart with your investments where possible makes a good deal of sense for high net worth investors.

Investors in higher tax brackets might consider putting holdings that generate income in tax-deferred accounts such as an IRA or 401(k), for example.

Employer Stock

Another time where a total portfolio view is important is for investors with concentrations of their employer stock due to options, restricted stock units received or matching within their 401(k) made with employer stock. It's important to ensure other holdings across various accounts offer sufficient diversification to offset a large company stock position.

Regular Reviews

A portfolio evaluation should be done as part of an overall financial regular review. Based on the level of assets relative to your financial goals, do you need to take more or less risk? Has your situation changed over time since your last portfolio evaluation? Are you on track toward meeting your financial goals such as retirement, funding a college education or something else?

Based on this evaluation, you may consider rebalancing your portfolio to ensure your asset allocation is in sync with your financial plan, or even revising your overall asset allocation.

Ideally, you should evaluate your portfolio on a regular basis to ensure your investments are aligned with your financial goals. A professional financial advisor can provide the advice and expertise that you need to keep your investments on track.