We have identified five key steps which will help you perform routine maintenance on your investment portfolio;
These, in turn, will help you decide whether your investment strategy needs closer examination.
1. ASSESS YOUR GOALS
Frequency: At least once a year
How much you invest and what you invest in are functions of what you aim to achieve.
Think in specific terms, and this will give you a specific figure and a specific time frame: you may want to supplement your pension, buy a holiday home or even achieve financial independence.
Once you’ve determined how much you need and how long you have, you can determine an optimum annual return.
It is worth reviewing your goals on a regular basis in order to assess whether they remain relevant and realistic.
ACTION POINT - Take stock of your current financial goals and decide whether these are matched by your current strategy and portfolio.
2. MEASURE YOUR PERFORMANCE
Frequency: At least every six months
Ensuring you are on track to meet your goals means accurately measuring your performance.
As a starting point, it is worth calculating your ‘real return,’ which takes the rate of inflation into account.
ACTION POINT - Calculate the real return from your investments - this step-by-step guide shows how:
1. Start with the current value of your investments.
2. Subtract the value at the beginning of the time period you’re assessing.
3. Add any income or dividends paid out in that time, as long as they have not already been included in the current value.
4. Subtract any fees, trading costs, administration or legal charges - this gives you the actual return.
5. Divide the actual return by the value at the start of the period and multiply by 100 - this gives you the rate of return as a percentage.
6. Then, deduct the rate of inflation over the time period - this gives you a quick figure close to the total real return from the investment over the period.
3. LEARN FROM YOUR MISTAKES
Frequency: At least every six months
If any of your investments are not performing in line with your expectations, then you need to consider why this might be the case.
You might not be managing them efficiently enough or you could be failing to close out loss-making positions before they do real damage to your portfolio.
There is no shame in making mistakes - after all, there’s not a single investor who can claim to have gotten it right 100% of the time - but the important thing is to ensure you know why they happened.
ACTION POINT Review all of the investments (including shares, funds and bonds) which have underperformed in the period and analyse carefully where you have gone wrong.
4. REBALANCE YOUR PORTFOLIO
Frequency: At least once a year
The proportion of your portfolio you allocate to distinct asset classes will depend on your investment profile and appetite for risk, and in order to keep these proportions in line you will need to manage your portfolio actively.
A long-standing guide to help investors devise and manage their portfolios is the rule of 100.
Simply take 100 and subtract your age from it: the resulting figure represents the maximum percentage of the value of your portfolio which can be placed in riskier assets - and, therefore, those which have the potential to achieve a higher rate of return.
The principle here is that the closer you are to retirement, the less risk you’ll want to take.
For example, a 30-year-old investing in line with this rule might have 70% of their portfolio in equities and commodities (i.e., riskier) and 30% in cash and bonds (i.e., less risky), while a 60-year-old could have around 40% in the stock market and 60% parked in the bank or government bonds.
If, to take the latter example, you started out with 40% of the value of your portfolio in equities and 60% in bonds, and the price of the shares went up while the bond market crashed, those proportions would move out of line with your targeted mix.
This is where rebalancing comes in. The idea is to periodically sell assets that have gone up and buy more of those that have fallen, in order to get back to a more balanced allocation.
This helps to keep a more consistent level of risk exposure, and also encourages the discipline of selling assets that have appreciated and buying those that may have become relatively and temporarily undervalued.
ACTION POINT Check the current allocation of assets in your portfolio and ensure it is in line with your strategy. If exposure to one asset class has fallen below or risen above your targeted threshold, consider selling and buying accordingly.
5. STAY INFORMED
Frequency: At least once a month
It is important to remain aware of when news which could affect the market perception of your investments is scheduled to come out.
Interest rates and economic growth are probably the two key variables on which all investors should have a grasp. In theory, growth in GDP leads to higher company earnings, while interest rates help determine how an equity is valued and the attractiveness of the main alternative asset classes cash and bonds.
In stock-specific terms, it is important to keep tabs on company announcements.
Listed firms are required by the London Stock Exchange to report any price sensitive information and this could include half-year and full-year financial results, a trading update ahead of these results, details of management changes, share dealing by directors or acquisitions.
ACTION POINT Although it is important to maintain a long-term perspective, you should be prepared to adjust your portfolio based on events in the outside world. Shares is a good source of regular market information.
If, for example, there is significant downturn in the global economy or substantial market correction, you could consider shifting some of your portfolio to lower risk equities or even different asset classes such as bonds or cash.
