These simple portfolio checks could save you from costly mistakes

News > Business News

FILE - Cash is fanned out from a wallet in North Andover, Mass, June 15, 2018. (AP Photo/Elise Amendola, File)

Audio By Carbonatix

2:27 PM on Tuesday, September 8

By CHRISTINA BENZ of Morningstar

A portfolio management policy of benign neglect beats a too-active one any day. Nonetheless, it’s a good idea to check up on your portfolio periodically. Here are key items to keep on your dashboard.

Step 1: Conduct a wellness check.

If you’re still accumulating assets for retirement, does your current portfolio balance, combined with your savings rate, put you on track to reach your goal? Tally your various contributions across all accounts so far in 2026: A decent baseline savings rate is 15%, but higher-income folks will want to aim for 20% or higher. You’ll also need to aim higher if you’re saving for non-retirement goals like college funding for children  or a home down payment. Fidelity Investments has helpful benchmarks to assess retirement nest egg adequacy at various life stages.

If you’re retired, the key gauge of the health of your total plan is your withdrawal rate—your planned portfolio withdrawals for 2026, divided by your total portfolio balance at the beginning of the year. The “right” withdrawal rate will be apparent only in hindsight, and ideally you would vary your withdrawals each year based on how your portfolio has performed and your life expectancy. The 4% guideline is a reasonable starting point. Our recent retirement-spending research explores the interplay between current market conditions and safe withdrawal rates.

Step 2: Assess your asset allocation.

Morningstar’s X-ray view—accessible to Morningstar Investor subscribers who have portfolios saved to the site—provides a look at your total portfolio’s mix of stocks, bonds, and cash. You can then compare your actual allocations with your targets. If you don’t have targets, high-quality target-date series such as those from Vanguard and BlackRock’s LifePath Index Series can serve a similar role for benchmarking asset allocation. My model portfolios can also help with the benchmarking process.

A portfolio that tilts mostly or entirely toward stocks is fine for younger investors. But a too stock-heavy portfolio is a risk factor for investors nearing or in drawdown mode: Insufficient cash and high-quality bond assets to serve as ballast could force withdrawals of stocks when they’re in a trough, permanently impairing a portfolio’s sustainability. If your portfolio is notably equity-heavy relative to any reasonable measure and you’re within 10 years of retirement, derisking by shifting more money to bonds and cash is more urgent.

Step 3: Figure out if you have enough liquid reserves.

The standard guidance for working people is three to six months’ worth of living expenses in liquid reserves as an emergency buffer, and higher-income workers and contractors/gig economy workers should target an even higher cushion.

For retired people, I recommend holding six months’ to two years’ worth of portfolio withdrawals in cash investments that can provide a spending cushion if stocks head south or bonds take a powder, or both, like in 2022. Retirees whose portfolios are equity-heavy can use rebalancing to top up their liquid reserves.

Online savings accounts and certificates of deposit are usually among the highest-yielding FDIC-insured (or Federal Deposit Insurance Corp.-insured) instruments, but money market mutual funds, which aren’t FDIC-insured, offer you the convenience of having your cash live side by side with your investment assets.

Step 4: Review your equity positioning.

Many portfolios are heavy on U.S. large-cap growth names, especially in the technology sector. Check your portfolio’s Morningstar Style Box exposure in X-ray to see how your equity holdings are arrayed across the size/style grid. Check your sector positioning, too; X-ray showcases your portfolio’s sector exposures alongside those of the S&P 500 for benchmarking.

Step 5: Evaluate your fixed-income exposures.

Review your positioning to ensure that your bond portfolio will deliver ballast when you need it. Taking credit risk has paid off over the past decade, but lower-quality bonds also tend to be more vulnerable during weak economic environments when stocks are also struggling. If you’re adjusting your fixed-income portfolio, redeploying money from higher-risk bond segments into lower-risk alternatives will improve your total portfolio’s diversification and risk level, even as it’s likely to lower the yield. To the extent that you make room for lower-quality bonds, think of them as equity alternatives, not bond substitutes.

Step 6: Check up on your individual holdings.

Scanning Morningstar Ratings for stocks and Morningstar Medalist Ratings for mutual funds and exchange-traded funds is a quick way to view a holding’s forward-looking prospects in a single data point.

For funds, red flags include manager and strategy changes, persistent underperformance relative to cheap index funds, and dramatically heavy stock or sector bets. For stocks, red flags include high valuations and negative economic moat trends.

Also, take note of highly appreciated positions that are taking up a larger share of your portfolio than might be ideal. (More than 5% of total equity assets is a good benchmark for “too much.”) Company stock is a frequent culprit. Such holdings are easily addressed if they reside in a tax-sheltered wrapper like a 401(k) or an IRA, where selling won’t trigger a tax bill. If you’d like to reduce holdings in a taxable account, run some projections on how selling might affect your tax bill.

_____

This article was provided to The Associated Press by Morningstar. For more personal finance content, go to https://www.morningstar.com/personal-finance.

Christine Benz is director of personal finance and retirement planning for Morningstar and co-host of The Long View podcast. Subscribe to her free newsletter, Improving Your Finances.