Portfolio Revision 🏗️🔄
Collecting returns and evaluating performance is not enough. If your evaluation shows that the portfolio is no longer efficient, or no longer fits your goals, you must perform Portfolio Revision.
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Price Drift
Trigger 1
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Goal Change
Trigger 2
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New Insight
Trigger 3
1. Why Revise?
A portfolio that was "Optimal" two years ago is likely not optimal today because:
- Price Changes: Some stocks grew huge, others stayed flat, changing your risk exposure.
- Goal Changes: You might be getting closer to retirement or needing money for a house.
- Market Insight: New information makes some previously "Good" stocks look "Bad."
- Risk Profile: Your personal tolerance for risk might have changed.
2. The Cycle of Management
Portfolio management is a continuous cycle:
- Selection -> Build the portfolio.
- Monitoring -> Watch the markets.
- Evaluation -> Check the performance.
- Revision -> Change the mix (Go back to Step 1).
3. Active vs. Passive Revision
- Active Revision: Constantly looking for "superior" stocks to replace existing ones. This results in high turnover (lots of buying and selling).
- Passive Revision: Only making changes when the portfolio drifts significantly from its target weights (Rebalancing).
Important
The biggest enemy of portfolio revision is Transaction Costs. Every time you sell a stock and buy a new one, you pay brokerage fees and taxes. You should only revise if the expected benefit is greater than these costs.
Summary
- Portfolio Revision is the practice of updating your investments.
- It is triggered by changes in the investor or the market.
- It is a continuous, repetitive process.
- The goal is to keep the portfolio on the Efficient Frontier.
Quiz Time! 🎯
Test Your Knowledge
Question 1 of 4
1. Portfolio Revision is the process of: