When and When Not to Revamp Portfolios: Morningstar's Benz

When to Revamp?

So when does a portfolio overhaul make sense for financial advisors’ clients? Major life changes, especially imminent retirement, call for a reassessment, Benz suggested in her Morningstar.com talk.

People in their 60s to early 70s, nearing retirement, typically think about the feasibility of their portfolios and plans, she said, noting the importance of positioning investments to last as clients age.

Benz advocates a bucket approach for retirement portfolios, which uses the client’s time horizon to guide how to position their assets. This concept holds that clients should keep near-term living expenses in cash and invest assets they won’t need for years in diversified, long-term securities.

“I would hold portfolio withdrawals for just one to two years in cash, withdrawals for the next five to eight years in bonds, and the remainder of the portfolio, for years 10-plus, in stocks,” she explained to ThinkAdvisor.

A Windfall Evaluation

Receiving a financial windfall also merits a portfolio reevaluation, according to Benz.

In that case, a client’s portfolio moves will depend on their goals, she said, noting that a client will likely put the money into different investments if they plan to add an inheritance or lottery winnings to retirement savings versus making a major luxury purchase in the near term.

“By all means get the assets into something that is safe and pays at least some interest while you sort out next steps. And it makes a ton of sense to both review goals and figure out which capital-allocation decision, including debt paydown, offers the highest potential return on investment and does the most to improve the investor’s financial picture,” she told ThinkAdvisor.

“For investors who don’t have adequate emergency savings and/or have high interest-rate credit card debt, steering the funds to address those issues will very often be the most prudent use of funds. But such individuals might benefit from taking an ‘all of the above’ approach, using the funds to pay off high-interest rate debt, bolster the emergency fund, and invest for long-term goals such as retirement or college savings for children,” Benz added.

Streamlining

Clients also could be well-served by a portfolio assessment if they’ve collected many — even hundreds — of securities over the years but haven’t really developed a blueprint for their holdings, she said on Morningstar. “That can be a phenomenal catalyst, realizing that you’ve been an investment collector, now it’s time to get serious about my portfolio’s asset allocation,” said Benz.