Knowing when to make a portfolio change

by Jerry Wagner

Decisions. We make them every day—some small, others far more consequential. When it comes to investing, one decision seems to come up again and again: When should you make a portfolio change?

Many decisions come down to choosing between alternatives. But another category tends to matter more over time.

The first type is tactical. It is often reactive. It may involve logic, but emotions are usually at the center: “This just feels right.” “I like the look of this one.” “I’m feeling bad, and this makes me feel better.”

The other category is strategic. These decisions are more deliberate. You develop a plan, put it in place, and evaluate the results over time.

But even the best plans are not meant to remain unchanged. As President Dwight D. Eisenhower (also a five-star general) said, “In preparing for battle I have always found that plans are useless, but planning is indispensable.”

Planning matters—but it also requires flexibility.

So when should we change our plans?

Think about the everyday services we use—cell phones, streaming platforms, or mobile plans. When do we switch?

Usually, the answer is simple: when they stop working.

With a cell phone, the signs are clear. The screen cracks. The battery won’t hold a charge. The camera degrades. Storage runs out. At some point, it no longer meets your needs.

Those are clear, objective signals.

When it comes to your portfolio, the decision is not so straightforward. It is much harder to determine whether it is truly “not working” or simply going through a difficult period.

As with other decisions, there are both tactical and strategic elements at play.

The temptation to make a tactical change

When markets fall day after day, many investors who say they follow a buy-and-hold approach begin to reconsider. Diversification is often cited as a risk-management tool, but as the losses mount, even the most committed passive investors may conclude, “Enough is enough.”  That often leads to a shift from growth-oriented investments to a more conservative, defensive posture.

This is exactly the type of emotional reaction that can be of concern in tactical decision-making. Studies have shown that investors often exit equities at the worst possible time. During the 2008 decline, for example, the market bottom coincided with the highest level of mutual fund outflows from stock funds.

Selling also creates a second challenge: deciding when to get back in. That decision is just as susceptible to emotion. After experiencing significant losses, many investors hesitate to reinvest, even as markets recover. Some wait years, missing much of the rebound before they feel comfortable returning to equities.

Is it time for a strategic change?

After experiencing multiple 50%-plus market declines this century, many investors began to look for a different approach. They turned to active asset managers like Flexible Plan Investments (FPI). We use dynamic risk management to determine when portfolio changes may be appropriate and implement them systematically.

Choosing a dynamic risk manager is a strategic decision grounded in experience and market history. It reflects a shift away from emotional, reactive decision-making and the constant pressure to “do something,” and toward a more disciplined, quantitative approach managed by a professional third party.

That does not mean the urge to make a tactical change disappears when losses occur. Those reactions are natural. But in this case, it is often best to stick to the plan. With a structured process in place, the impulse to change can be easier to manage. We also provide investors and their advisers with tools to help evaluate whether acting on those impulses makes sense.

How we help you “stick to the plan”

When investors see losses in their FPI account, the first step should be to talk with their adviser. A review of the portfolio may show that the strategies are already positioned defensively, with greater allocations to cash or even to inverse fund positions.

Actively managed investment strategies not only include sell methodologies based on historically tested processes, but they can also be programmed to buy back into the equity market when conditions improve—without the need for emotionally driven decisions.

Investors who abandon these strategies lose that discipline. They may move to cash at the wrong time and struggle to reinvest when opportunities return. In effect, they are trying to “market time” the tactical manager and reintroduce emotion into the process. When you have chosen a professional to make tactical decisions, it is generally best to stay with the original strategic plan.

How do you know if your portfolio still meets your needs?

If tactical decision-making is not helpful when working with a third-party dynamic risk manager, when is the right time to make a change? How do you know if your strategy is no longer meeting your needs?

Start by clearly defining those needs. Market declines can shift how investors think about risk and what feels appropriate for their portfolio.

One practical step is to revisit your suitability questionnaire. Your original responses may have reflected a very different market environment—perhaps one marked by steady gains and new highs.

Completing the questionnaire again can help determine whether your risk tolerance has changed. If so, it may make sense to adjust the overall aggressiveness of your portfolio.

Ultimately, the key is to evaluate performance over the long term and across full market cycles. Is the portfolio still aligned with your objectives, even if it is going through a period of weaker performance?

How do you know if a strategy isn’t working?

For many years, I struggled with how to answer that question in a quantitative way.

Then in 2007, we introduced our OnTarget Monitor, which models the expected performance of strategies and portfolios over a defined time horizon. This made it possible to create a personal benchmark for each investor.

That benchmark can then be compared with actual performance over time. Investors can view this comparison on the OnTarget Investing website, in their account statements, and through their adviser’s My Business Analyzer tool.

The OnTarget Monitor uses a color-coded system. If performance (shown by the solid black line) falls into the red zone, it may indicate that a strategy is not meeting expectations and could warrant a review. However, during broad market declines, being “in the red” may simply reflect overall market conditions rather than a breakdown in the strategy.

If your account falls into the red zone, it is important to discuss it with your financial adviser. We cannot change your allocation decisions unless you and your adviser submit a strategy change.

If performance remains within the other zones, there is typically no need for immediate action—you can continue to follow the plan.

In the end, it’s usually best to stay the course

Napoleon Hill, the author of the bestseller “Think and Grow Rich,” once said, “Within every adversity lies the seed of an equal or greater benefit.”

Changes in strategy may create new opportunities as market conditions evolve. But before making a change, it is important to ensure that your portfolio still reflects your suitability and that the strategy in question is no longer working as intended. After all, some seeds take longer to grow than we’d like.

In the end, staying the course and allowing FPI to continue managing the account with its existing strategies may be the best decision of all.