We’re coming towards the end of what has been a challenging year for investors. Markets have been both volatile and disappointing, and while there has been some reward for patient investors since the beginning of October, there is no expectation that volatility will ease going into 2023.
You will have noted us constantly encouraging investors to stay focused on long-term objectives and not to try and beat the market based on short-term dynamics. But this does not mean you should “invest and forget”; instead, we are firm believers that portfolios should be managed and reviewed periodically. Just like your own physical health or even the engine in your car – regular checks make sense instead of waiting for that ominous red light to appear.
How often is a “periodic” review?
So, how often should this be done? If you feel you have built a robust portfolio which you understand, it should be reviewed annually, assuming there have been no significant changes in your objectives, circumstances or in the markets themselves. If any of these have changed significantly (as markets did in 2022), you should review your investment plan and portfolio to assess whether there are actions you could take to capitalise on or take account of the new circumstances. Even if the result of the review is “no change”, this exercise will at least provide you with peace of mind and the confidence to continue investing.
Here are our thoughts on what a rigorous portfolio review service should consist of:
Revisit your goals, they can change and evolve over time
To begin, your broader financial goals should be reviewed, articulated, and updated if needed. These goals can change depending on your circumstances or some external forces out of your control, and so it is important to ensure that your portfolio remains aligned with these goals.
Review the investment environment
Persistent inflation, slowing growth and interest rate rises, are causing increased volatility in the market. This can make investors feel very uncomfortable, leading them to make irrational decisions. Investors should accept that there will be periods of ups and downs in the market and keep their focus on the long term. This is easier said than done, but if your portfolio is well diversified it can help minimise the impact of market volatility. Having a diverse portfolio means you own a variety of assets that perform differently over time, but not too much of any one investment or type.
Review how your portfolio is delivering for you
This step considers how the mix investments or funds in your portfolio have performed to date and whether they are likely to deliver in the future. At this stage it needs to be considered if your portfolio’s current mix is likely to achieve your investment objectives that may have changed, and whether they remain the optimal mix in a changed investment environment.
Often this may result in no change needed, but sometimes your portfolio will need to be tweaked.
Asset Allocation is the key lever
It is generally accepted that asset allocation, i.e. whether you are invested in equities, property or bonds, is a significantly bigger driver of your overall investment return than the fund or stock selection that you make. This is the first portfolio factor to be considered carefully, and this should reflect your goals, a review of the investment climate and your appetite and tolerance for risk. Your asset allocation should reflect not only how comfortable you are taking risk – your appetite for it, but also whether your portfolio can realistically sustain that level of risk that you want – your portfolio’s tolerance level.
You should ‘look through’ all your investments to establish your portfolio’s overall percentage exposure to each asset class. Exposure to equities, bonds, property, alternatives etc will likely vary from one fund to the next at any particular point in time but most funds are designed with a particular level of market risk in mind, which is likely to be the key driver of the investment returns and volatility that investors will experience.
Review your investment fund selection
Whether your asset allocation has changed or not, your fund selection should always be reviewed. A professional investment advisor will review the strategies of your funds and will give an informed opinion of how they are performing. Potential returns on any investment or fund should not be assessed on a standalone basis, but should take into consideration all the associated risks, including, but not limited to the expected volatility of returns. In other words, if you are taking on a certain level of risk, you should be rewarded with certain level of returns over a period. If you are not getting these expected returns, you need to understand why, and be prepared to switch to a better performing investment.
Try to reduce investment charges
You can’t guarantee how well your funds will perform, but you can control how much you pay for them. Platform or investment provider charges and fund charges eat away at your investment returns over time. For example, if your portfolio is valued at €500,000 today and you reduce your total annual charges from say, 1.5% to 1%, and assuming it grows by 4% per annum over 10 years, your portfolio would be around €32,000 better off at the end of the period.
Rebalance when necessary
Once you have reviewed your portfolio, the performance of individual asset classes will immediately change at different rates of success. If these differences are significant, your asset allocation will move away from your preferred portfolio weighting for each asset class. Even where your portfolio has been given a clean bill of health in a review, this is a good time to ensure that after the movement in different asset classes, your portfolio is brought back in line with your desired asset allocation mix. This is known as rebalancing and can be a very effective way of selling some of your assets that have done well (i.e. are more expensive than they were when you bought them) and buying assets that have had a bad run (i.e. are cheaper than they were previously).
2022 has been a challenging year for investors. Challenging market conditions expose weaknesses in a poorly constructed portfolio. If you are unsure or unhappy with the performance of your portfolio, your investment plan may not be fit for purpose. Having a plan in place provides a framework for constructing a robust portfolio and makes the portfolio review process simpler because you know what you are invested in and how your investments are expected to behave through market cycles.
Is now the time for you to review your investment portfolio?