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How to review your investment portfolio

Your financial goals rather than market moves should influence your investment decisions
July 1, 2020
  • Keep on top of your investments by reviewing your portfolio
  • Don't make portfolio changes without considering your personal circumstances and appetite for risk

As the first half of 2020 draws to a close, investors have plenty to consider. With equity markets having experienced extreme volatility and the coronavirus lockdown placing mass swathes of the economy in jeopardy, you would be right to have plenty of questions about the health of your portfolio. But you should consider them in a structured way, taking into account some general rules, rather than making kneejerk reactions to market movements. So we have set out some steps to help you sort out your portfolio in a calm and sensible way.

 

Stay on track

It generally makes sense to review your portfolio at least once and possibly twice a year, but to avoid tinkering too often. You might also be tempted to check your holdings at moments of extreme volatility, such as when equity markets plunged in February and March. But market moves alone should not influence your investment decisions. Instead, any review should be led by your financial goals and whether your portfolio is helping you to achieve these.

The coronavirus crisis has undermined the case for many investments. Passive exposure to risky asset classes such as high-yield bonds or certain equity markets seems questionable at a time of great uncertainty, while income investors are painfully aware that many dividend-paying stocks and income funds are likely to generate less cash than they did just a year ago. Even safe-haven assets such as government bonds, which some investors held to offset equity market falls during the recent sell-off, may not necessarily continue to play this role.

So it is worth assessing all your holdings to see how they have held up during the crisis, what their future holds and whether they can continue to play the same role in your portfolio.

Adrian Lowcock, head of personal investing at broker Willis Owen, suggests investors consider what performance can tell them about portfolio diversification.

“It can be useful to see how your investments performed during the sell-off," he explains. "Look at the maximum loss, known as the max drawdown, of each investment and how it recovered. This will help you tell which of your investments behaved very similarly [to each other] during the crisis and which did something different. It is important to have a mix of investments which are not all doing the same thing [as each other].”

A more granular approach is also important. Because the coronavirus is especially challenging for certain industries, closely assess a fund’s main holdings and sector exposures. Apply the same level of scrutiny to direct shareholdings.

 

Investment decisions in context

Don't make portfolio changes without considering your personal circumstances and appetite for risk.

“Assess your personal circumstances,” says Rowena Griffiths, chartered financial planner at Female Financial Management. “Has anything, such as your employment status, need for income or retirement date changed? If [it] has changed, do you still have the same risk appetite?”

A change in circumstances could take many different forms. If you have suddenly decided to retire earlier than originally planned, this could mean that you need to take a more defensive investment strategy or have a greater focus on generating income. If you have lost your job or other sources of income following the coronavirus outbreak, you might have had to pause contributions to your portfolio, withdraw money or take a more defensive investment approach. So, as always, investments should be made on the basis that you can afford to do so without creating an unnecessary financial burden.

As we explained in Take this Covid-19 cue to revisit your strategy, this year’s sell-off also raises broader questions about risk appetite. If huge moves in markets make you extremely uncomfortable it could be psychologically easier to reduce your weighting to equities and have a larger allocation to defensive assets. But remember that this kind of rebalancing could reduce your portfolio's potential future growth.

If you are happy with the original composition of your portfolio it would make sense to take it back to this. This could involve selling some of the investments that have risen in value and now account for a larger proportion of your portfolio, and using the profits from the sales to add to some of the holdings that have fallen so account for less than they originally did. In this way, you can return your portfolio to its original asset allocation.

But while it is sensible to rebalance at least once a year, doing this in times of high market volatility incurs some risks. Martin Bamford, head of client education at independent financial adviser Informed Choice, warns: “Markets could move significantly when you are in cash between trades. A good rule of thumb during volatile markets is to avoid rebalancing when you are within 5 per cent of your target position.”