By Dr. Charles Patterson, WCI Columnist

Market conditions change frequently and unpredictably, producing winners and losers. For the young investor, a lack of experience in different market environments and a burgeoning understanding of personal finance can sow doubt in the best-laid investment plans. Comparisons to others’ performances, talking heads that disparage this asset class and that strategy, and the allure of speculative success all fuel this uncertainty. When reading about the fabulous returns of capitalist savants, it's easy to forget that most of everything you need to know to be financially successful can fit on an index card.

For the early-career physician lacking wisdom and assets to protect, this period of learning is fantastic for solidifying a winning long-term strategy. Creating a thoughtful, workable investment plan is easier and more cost-effective than ever before. And once a plan is crafted, all one has to do is stay the course. Sticking to a blueprint is much easier when you are seasoned with the knowledge of performance variability and are confident in the strength of your philosophy. However, it is also true that sometimes your investment portfolio needs to change. The following exercise should serve as a litmus test for assessing your strategy.


Determining a Need for Change

Investing shouldn’t evoke feelings. It should be dryly engaging but completely boring. Step one in addressing the “why” of your change of heart is an examination of whether sentiment is involved. If the fear of missing out (FOMO) overcomes you when comparing oneself to peers “crushing it” while trading meme stocks, then take inventory of long-term market performance and remind yourself that, in this race, you are the tortoise and not the hare.

This is not to say that there aren't legitimate reasons to change an asset allocation. These may include but are not limited to the following:

  1. Risk tolerance changes: This occurs somewhat naturally as a portfolio matures, as growing into a more conservative equity exposure can be a good and rational thing. However, this evolution is more of a rebalancing strategy than a seismic tolerance shift. Experiencing a bear market for the first time can be eye-opening with regard to actual risk tolerance, and this knowledge can inform a stronger personal asset class balance. Experience breeds self-awareness. It is, in a way, a mirror that shows exactly what kind of investor you are. This is paramount in crafting a long-term strategy that can grow in an unperturbed fashion.
  2. The written investment plan was unreasonable: There are many reasonable asset allocations out there, and as life-long investors, we won’t know the best of the lot until after our chapter ends. But if your investment plan was crafted by the person who peddles whole life insurance or relies on tax-inefficient or expensive funds, then you should realize that they are probably unreasonable. This is discussed in detail below.
  3. Life circumstances change the investing horizon: New health concerns, loss of income (as in disability or business loss), long-term care for an ill dependent, or any number of traumas can change life in a heartbeat. While well-planned insurance can replace income, long-term investment strategy is likely to be affected.

Beyond those listed above, there are other good reasons to reconsider your investment plan. In fact, questioning your plan is a fine way of cementing it. But do so from a position of calculating scrutiny, for while there are a multiplicity of reasons to question, there are very few that actually warrant a change.


A Reasonable Plan

As previously stated, there are innumerable variations of appropriate portfolios that will, in the end, yield similar results. As it pertains to long-term investing, I would submit that a “reasonable” portfolio fulfills the following criteria:

  1. Tax efficiency: The first big drag on returns. Preferential use of retirement accounts such as IRAs, 401(k)s, and 457 plans are generally going to retain value more effectively than taxable accounts. Use of Roth space is almost always best. Beyond the vehicle choice, funds into which your income is pouring should also be tax-efficient. Considerations here include ETFs vs. mutual funds and the judicious use of bonds in the appropriate account.
  2. Cost: The race to the bottom in brokerage fees has generally been a benefit to independent investors. But remember that the finance industry is an industry exactly because it means to profit from you, the consumer. If you are paying exorbitant fees to invest, your plan has room for improvement. Learning from mistakes can be one of the best ways to gain wisdom, and it's cheaper when done earlier. Two years into my investing career, I looked into my portfolio and realized that the “financial advisor” (read: salesman) had advised me to allocate a significant portion of my retirement into a “moderately aggressive” (50/50) fund with an expense ratio of 1.5. At the time I opened the account, I could hardly spell “IRA,” let alone describe my risk tolerance or how an index fund worked. Far be it from the swindler on the other side of the phone to explain these things. Left unchecked, this duplicitousness could have cost me hundreds of thousands, if not millions. Fees are everywhere. Whether hidden in funds or tacked on by advisors, fees eat your lunch. It is a truism that value and success can be found with very little expense, no hassle, and minimal risk. Challenge yourself to understand where every saved dollar goes, and be vigilant (if not paranoid) about minimizing costs.
  3. Diversity: It is far more important to manage your behavior than it is to manage your assets. In reality, managing the portfolio is simply investing and balancing according to the established plan. When there are market downturns or huge fluctuations in various asset classes, the human tendency will be to change the allocation so as to “catch the wave” or to “bail out.” As much as possible, avoid this trap. A well-diversified portfolio is one of the greatest buffers to change, offering reassurance that you are benefiting from gains in hot commodities and minimizing losses in bear markets.
  4. Captures the market: A fundamental principle in your investment philosophy is your level of contentment with market returns. Stated differently: those who seek gains above the market returns (alpha) are inherently more tolerant of risk (beta). Any fanciness with factor investing or the like is your prerogative, but it increases the risk of missing that which is easily achieved. Conversely, diversifying into fixed income will (with time) underperform the stock market, a price that is paid for greater stability. We know that if you are satisfied with long-term market performance, you can ostensibly achieve that in an efficient manner with a one-fund portfolio. This is the benchmark.

changing investment portfolio

A reasonable portfolio is one that is unlikely to be discarded. Thus, if a change to the asset allocation is deemed necessary, it must also be concluded that the change will result in higher tax efficiency, lower cost, a greater buffer against future change, and/or a more representative personal tolerance of risk.


Staying the Course

Because so many plans are reasonable and because the long-term investor will likely never know which is the absolute best, the most correct answer for you may be determined by your comfort. Yes, I know that I said that investing shouldn’t evoke feelings. But comfort in this respect is a sentiment that guards against change.

A carefully produced strategy includes flexibility. This means that one should be open to learning about and thoughtfully considering differing strategies. Changes can and sometimes should be made. But this openness should be constrained by humility: the investment horizon is long, and no one has a functioning crystal ball. Having the self-awareness to admit that you don’t know is a valuable skill in staying the course.

Continued financial education should reinforce a sound foundational knowledge. Earth-shattering discoveries in finance are relatively rare and are broadly known and accepted. The first years of financial education should solidify a base of knowledge and further protect against massive shifts in the portfolio. A sound investment strategy is resistant to the winds of change because it is reasonable, flexible, and crafted with respect to the investor’s discipline and self-awareness.


Assessing Performance

To be in the market is to take a calculated risk. It goes up, it comes down, it goes back up again. At any given time, there will be “winning” portfolios and “losing” portfolios. For those who share a long-term investing mindset, assessing a winner from a loser is a fool's errand exactly because the game isn’t over until we are over.

Periodically monitoring performance is fine and good. But again, at some point (or frequently), your portfolio will be underperforming others. Speaking from experience, it's not awesome to know that your friend’s net worth is 15% higher because of his willingness to go 100% into the market. I do, however, take solace in the knowledge that my allocation reflects my risk tolerance. For as bad as it may feel to look at performance, a conscientiously established portfolio should cultivate an aversion to change.


5 Questions to Ask Prior to Making a Change

As we have seen, there are good reasons to change an investing plan. But I also hope that we have established that doing so shouldn’t be a trifling matter and should be done only with compelling evidence that drives the necessary change. The following five questions succinctly guide the thought exercise:

  • Why does my current plan need to change?
  • Is the new investment strategy reasonable?
  • Does this change result in a better reflection of my investment philosophy and behavioral tendencies?
  • Am I OK with this being the wrong decision?
  • Will the new plan be more resistant to future change?

Investing is the conscious act of diligently nurturing that which has the potential for growth. Investing is only as complicated as you want to make it, only as risky as you wish it to be, and only as didactic as interests you. In this light, investing is intensely personal and the manner in which it is conducted should reflect the intentions of the individual investor. Stay the course and guard against change with a carefully considered strategy that fosters contentment.

Have you drastically changed your strategy at any point during your investment career? What happened? Were you happy with the change or regretful? Comment below!