There are several reasons why investors can’t always maintain a long-term orientation, but a primary driver is the approach taken in monitoring their portfolios. Some investors frequently check price changes on individual holdings without any context to assess those price changes. 

Below is one approach for monitoring a portfolio to help investors reach their financial goals. 
 

Establish the foundation to monitor your portfolio

The purpose of a portfolio review is to answer some key questions, starting with: What are you trying to achieve by investing in the first place?

That means defining your financial goal, understanding your risk appetite, and having a view of the return needed to achieve your goal. 

Having clear goals provides a solid framework, and may reduce the chances of poor investment behaviours. If you have a structure around portfolio monitoring and maintenance, and you stick to it, it is less likely that you are going to trade based on market volatility or uncertainty. This can be one of the biggest detractors of investor returns. 

Without clear goals, investors can fall into the trap of focusing on portfolio performance against broad market indices. It is possible that an investor could become overly fixated on short-term market movements rather than long-term trends.

Investors should consider focusing on long-term objectives, and how investments are supporting or detracting from their efforts to achieve a structured financial goal.

Let’s illustrate this with a hypothetical example that demonstrates the process that an investor might go through to evaluate their portfolio.

For example, an Investor is five years into a ten year goal that they are working towards and they need to achieve a 6% annual return to get there. The market has returned 8% per annum over the last five years, and the portfolio has achieved a 7% per annual return.

Some investors would be disappointed that the portfolio has not beaten the market return. It is likely they are measuring success against this arbitrary benchmark. In reality, this portfolio has done its job.

The portfolio is on track to help the investor reach their financial goal. An investor with a portfolio structure will realise they are still on track. An investor with no context may decide to trade based on this result.

Portfolio monitoring does not need to be a complex task. Below are five key considerations during the process.
 

1. Know how often you are going to review your portfolio

The most appropriate frequency will depend on your own circumstances.

Some people prefer yearly portfolio reviews when they receive their annual statements from their investments and are filing their tax return. This may also reduce poor behaviour as they are reviewing their portfolio annually, and with a specific structure, rather than on an ad hoc basis.

One trigger for a review of your portfolio and investment strategy is when there are major changes to your life or financial goals. For example, if you get a significant pay rise that means you may be able to contribute more; if you receive an inheritance; or if you lose your job and can’t contribute to your investments for a certain time period.

Personally, I prefer a half-yearly portfolio review because I use a mid-year review to collect all of my annual statements and gather a comprehensive view of my financial position. 

I use my second review at the beginning of the calendar year to reflect more deeply on the year ahead and assess whether there are any changes to my goal or circumstances, as this is often when I also have my employment reviews.

Your own investment tempo will depend on your circumstances and what works for you.

Some investors will look at their portfolio more frequently than I’ve suggested. This behaviour is understandable but consider using the more formal reviews as the impetus to make any major changes to your portfolio and investment approach. 
 

2. Have your circumstances changed?

Remember, investing is about you and what you want to achieve.

An important step should be to review your own circumstances rather than focusing on the investments you hold. Do you earn more or less and are therefore saving more or less? Have there been unexpected expenses? Review how any changes in your life may impact your investment strategy. [Investors could consider working with an independent, licensed financial adviser to discuss these questions]
 

3. Compare your portfolio performance against your required rate of return

Morningstar is a proponent of a goals-based investing philosophy. This means that your goals are at the core of your portfolio, rather than an arbitrary benchmark (such as the S&P/ASX 200 Index). As mentioned earlier, an investor would compare the return they expect to earn over the entire investment period to achieve their goal and maintain their portfolio performance.  [Sometimes, investors do not achieve their required rate or return in a particular year. Understanding why this occurred, learning from it, and not losing confidence as an investor can be important]. 
 

4. Take stock of your asset allocation, and whether it needs to be rebalanced

Part of the purpose of having structure in your investing process is to understand your risk profile and the asset allocation you need to achieve your goals. This is intrinsically linked to the required rate of return for your portfolio.

For example, if an investor is targeting a 3% annual return, their portfolio might be tilted towards more defensive assets. If their required rate of return is higher, they might have more growth assets like shares, however their risk appetite will also need to be lower.  

When evaluating your portfolio, compare your target asset allocation with the current asset allocation of your portfolio. This will form the basis for a decision around portfolio rebalancing (increasing or reducing asset allocation weightings to return them to the targeted portfolio weighting).

There are two theories around portfolio rebalancing. The first is that you pick a set interval, such as annual, to rebalance portfolio asset weighting. At this stage, an investor would review their portfolio and get it aligned from an asset allocation perspective. 

The second theory is that you instead use tolerances. For example, an investor may set a 10% tolerance which means that if their goal is to have 60% allocation to equities and it gets to be more than 66% the investor would rebalance (back to 60%).

Another version of this is choosing a range. You may have a goal that stipulates that you have certain percentage allocation to equities. In both these cases you are trying not to do it too often as your portfolio will naturally fluctuate.  

The reason that you may not want to do it too often is because rebalancing has a downside. There are transaction costs and there are likely taxes as you sell things that have gone up in value. 
 

5. Assess whether your required rate of return has changed

Your required rate of return may need to be recalculated periodically. Your investments may have performed very well, and it could mean that you are ahead of your goal. You may choose to reduce risk in your portfolio. If you are not on track to meet your goal, you may choose to invest in more aggressive assets. 

It is important for long-term investors to understand that missing your required rate of return in one period doesn’t always necessitate change. Markets will always be volatile, and you may be in a period of poor performance. It is important to assess whether a longer period of underperformance or overperformance necessitates a change to reflect this.
 

Conclusion

Portfolio monitoring is an essential part of investing, but it must be done with structure and discipline. Rather than focusing on short-term performance, align your reviews with your long-term goals, check asset allocation periodically, and rebalance only when necessary. 

This approach ensures that you remain on track while avoiding costly mistakes caused by overtrading and chasing performance.