Concentration risk can cause an investment portfolio to underperform or be too volatile for your own liking. Concentration risk is why you need to analyze your investment portfolio at least once a year.
I suggest you rebalance your portfolio twice a year because your positions can change quite drastically as a percentage of your portfolio over time. If you don’t rebalance you portfolio twice a year, at least check your portfolio once a quarter. You might find you’re happy just the way things are based on your risk profile and leave well enough alone.
Just the fact that you’re staying on top of your investments 2-4X a year by checking your position sizes, reading your fund’s quarterly statements, and monitoring your general risk exposure is better than most people.
Even if you employ a financial adviser to watch over your money, you should check in to see that your money is allocated properly.
One person I knew thought she had 70% of her portfolio in the S&P 500 in 2013. When she finally opened up her year end financial statement she realized she was actually 70% in cash and 30% in bonds the entire time!
An Easy Way To Check For Concentration Risk
The easiest way to analyze your portfolio for concentration risk is to use my favorite free financial tool, Personal Capital. Personal Capital has an Investment Checkup feature to make portfolio analysis a breeze. Simply sign up and link your investment portfolio(s) and click the Investment Checkup button.
Investment Checkup Features
1) Analyzes stock concentration. You can now easily see what your largest holdings are. Further, you can see if you have too much of any one position which might threaten your portfolio’s risk profile. Sometimes your winners can really grow in size quickly if you aren’t constantly paying attention. Conversely, many people start ignoring their portfolios when some of their picks do horribly.
2) Analyzes domestic equity sector exposure. You can see whether you are overweight or underweight in any one sector. You can compare your portfolio to the S&P 500 as well as Personal Capital’s Tactical Weighting recommendation. The Tactical Weighting is based off equal weightings across sectors instead of market cap weightings. Tactical Weighting is also known as “Smart Indexing” according to PC.
3) Analyzes US equity style. See how your portfolio stacks up among large, mid and small cap stocks vs Personal Capital’s Smart Indexing recommendation and the S&P 500. The S&P 500 is market cap weighted while Smart Indexing is equal weighted across sectors. You might have too much or too little small cap or large cap exposure vs. the indices.
Below is a screen shot of what you should see when you log on to your Dashboard to help you access their newest features. Go to the top right and click “Investing” and then click “Investment Checkup“.
Analyzing Your Investment Portfolio
You’ll find the following three screenshots of your investment portfolio using the new Investment Checkup features.
1) Stock Concentration. A snapshot of your individual holdings and feedback on the diversification of your portfolio based on stocks, sector, and style. In this example, RKUS looks a little heavy. The tool suggests lowering exposure and keeping stock weightings the same.
2) Domestic Equity Exposure. A snapshot showing your portfolio is very overweight in technology based on our Tactical Weighting (Smart Indexing) suggestions. You can also click on the S&P 500 button to see how your portfolio stacks up to the S&P 500 market cap weighting. Technology is currently overweight based on our Tactical Weighting suggestion.
3) US Equity Style. A snapshot of your portfolio’s composition based on style vs. our Tactical Weighting recommendations and the S&P 500 composition. In this example, your portfolio is underweight Mid Cap Core and Small Cap Core and overweight Small Cap Growth and Small Cap Core.
Sector Weightings Debate
There is some discussion on whether comparing a portfolio to the S&P 500 or Personal Capital’s Tactical Weighting methodology is the better approach. I’m biased for indexing against the S&P 500 performance. But take a look at the below chart to see why aligning your portfolio to the S&P 500 might be a mistake.
In 1999, the S&P 500 technology weight grew to 28%. It was the hot sector, much like it is today. The sector then proceeded to decline by 80.5% over the next two years as the bubble burst. An S&P 500 portfolio underperformed an equal sector weighted portfolio as a result.
In 2006, Financials held a large 22.5% weighting in the S&P 500. Financials then declined by 79.9% in the subsequent two years due to the housing crisis. The mean reversion phenomena seems to be alive and well. Which is why it’s good to not let one sector become too overweight.
The good thing about the Investment Checkup feature is that you can compare your portfolio(s) to both the S&P 500 or to a Tactical Weighted portfolio.
To access the new Investment Checkup features:
1) Sign up for Personal Capital or sign in if you are an existing user.
2) Click the Investing Tab on the top of your dashboard
3) Click Investment Checkup from the drop down men
4) Click STOCKS (right of Allocation, left of Costs options) to get an assessment of all your investment accounts.
5) Click the down arrow in ALL ACCOUNTS to toggle between investment accounts for more specificity.
Don’t waste any more money paying excessive fees. It drag your performance down and cut short your retirement plans by potentially years!
Finally, concentration risk can be a big deal. Don’t let concentration risk put your retirement at risk.