Investments Self-Review: What You Should Know about Your Portfolio

Whether you built your investment portfolio yourself or worked with someone else, you should understand its basic design. The specifications of its design, especially the overall mix of stocks and bonds, determine your portfolio’s performance.

At the highest level, the amount your investment portfolio will earn over time and its day-to-day fluctuation in value is determined primarily by the mixture of stocks and bonds included. This is particularly true for portfolios built with investments that try to mimic the market, such as index mutual funds or index exchange-traded funds (ETF). It is less true, but still important, for portfolios built with investments that try to beat the market, in which the investment managers’ skill becomes an important factor in how much your portfolio will earn.

The amount your investments can earn increases with the percentage of stock you hold in your portfolio. For example, an investment portfolio with 100% stock and no bonds (100/0) will earn more over time than a portfolio with 60% stock and 40% bonds (60/40). However, the 100/0 portfolio will fluctuate in value far more than the 60/40 portfolio. During the Great Recession of 2008, a well-diversified portfolio holding only stocks dropped over 58% in value from the market peak on October 7, 2007, while a 60/40 portfolio dropped only about 38%. From the market bottom on March 9, 2009, through December 31, 2017, those same portfolios earned 18% and 12% per year, respectively. Essentially, portfolios with more stock perform like the tallest roller coasters: the highs are higher and the drops are farther and steeper—and just as breathtaking.

It’s important to know where your investment portfolio falls on the continuum between low-earning and safe on one end and high-earning and volatile on the other, as determined by its mix of stocks and bonds. Finding your portfolio’s mix may be as simple as reviewing a pie chart on your brokerage statements that breaks out your percentage of stocks and percentage of bonds. Many statements include this. But before you rely on this chart alone, you’ll need to be sure the picture includes all of your accounts. If it doesn’t—or if you have accounts at several brokerage firms or your statements don’t include these percentages to begin with—you will need to do a little more work to find your overall stock and bond mix.

To do this, gather up all of your brokerage account statements including both taxable accounts, such as individual, joint, and trust accounts, and retirement accounts, such as IRA, Roth IRA, and SEP IRA. Across all of your account statements, tally up the total value of all stock investments whether in the form of individual stocks, mutual funds that hold stocks, or ETFs that hold stocks. Include US stocks, international developed country stocks, emerging markets country stocks, and real estate investment trusts (REITs). If some mutual funds or ETFs hold both stocks and bonds, include only the stock portion. Next, add up the total value of your full investments across all of your accounts.

Once you have these two values, divide the total value of your stock investments by the total value of your full investments. This is the portion of stocks in your portfolio. For example, if your answer after dividing this out was 0.784, then you are holding 78% of your investments in stocks and 22% in bonds.

Now you know your top-level investment mix, or asset allocation, as it’s referred to among investment professionals. From here, you can consider whether this mix is right for you, or whether your portfolio needs some adjustments to reach your target mix of stocks and bonds. After a long run-up in stock markets worldwide since the Great Recession, many portfolios left unattended have seen an increase in their percentage of stock, which makes them riskier, and maybe riskier than intended. While risk can be rewarding, you always want to be the one deciding whether or not to take a ride on that roller coaster. Being aware of your portfolio’s asset allocation allows you to balance earnings and volatility intentionally in ways that meet your needs.