Don’t let “this” creep into your portfolio…


It is incredible how gradually it changes. It is changing right now. Subtle at first; but a steady progression none the less. Before you know it the landscape has changed completely. The nights are cooler, the skies are overcast and summer has gradually morphed into fall. The kids are back in school and, even before Thanksgiving has been and gone, the stores are filled with Halloween stuff. The kids are planning their costumes and calculating how they will carve their pumpkins into the scariest, creepiest images possible.

Call me an investment nerd but this always makes me think of portfolio creep.

What is portfolio creep?  It is the unintentional movement in a portfolio’s asset allocation and/or level of diversification to the point where it no longer meets the investor’s risk tolerance. This could mean that a portfolio carries too many individual stocks, too high of an allocation to stocks or the complete opposite scenario in which there is too much cash within the portfolio. Sounds scary, doesn’t it? Tell me if the following scenarios sound familiar:

A well balanced portfolio is created at the beginning.  This is the easy part. Some bonds, some stock exposure, some foreign content and some cash equivalents. What could go wrong?  Let’s start with the best case scenario. Everything goes incredibly well right from the start. The bonds provide a low, steady return and the stocks are going great. As the stocks increase in value they become a larger component of the portfolio and, unless the portfolio is re-balanced regularly, voila, you have portfolio creep. The portfolio has gradually become riskier and subject to greater potential volatility than initially intended. Not only that, but human nature kicks in and you think, “Hey, this is easy and working! Let’s do more!”  Which is all great until your portfolio has crept toward 100% stock exposure right as the market reaches its peak and begins to drop.

Now it gets a lot tougher. Everything that has been working suddenly stops working. Investments drop in price and here comes human nature again saying, “It’s ok. I’ll hold until it goes back to at least what I paid for it.” Before long, the portfolio is out of balance again. The stock component has declined to a much smaller percentage of the portfolio and buying more stocks causes anxiety because that internal voice is say “what if I’m wrong again!?!”

The risk is that investors end up doing the wrong thing at the wrong time. It happens time and again with amazing consistency. What is at risk is the lifestyle that the investors have worked so hard to build. Retirement might not be what was once planned or might need to be delayed. Now that IS scary!

If portfolio creep has snuck up on you this Halloween, call us at 519-780-4171. We have the tools to analyze your portfolio and the experience to make recommendations that will get your investments growing again.

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