It can be easy to fall into the trap of sitting back and letting your investments do the work once you’ve set them up. And there’s a lot to be said for keeping a distance from your portfolio, not least when market volatility might tempt you into making knee jerk decisions.
But long-term investing doesn’t mean sitting back and doing absolutely nothing until you need to access your money. While it’s rarely a good idea to keep making changes, there is a strong case for reviewing your portfolio regularly – experts recommend at least an annual review of your ISAs and pensions. It can give you peace of mind that everything is on track, and act as a safety mechanism in the event that things have gone awry. Here’s what you need to look at during your all-important review:
Make a fair comparison
If a fund is losing you money, you need to set their performance in context and check how the numbers compare to others in the same group. By comparing it to an appropriate benchmark you can see whether your manager has performed in line with everyone else, or if they have missed the average by a mile. If the latter is the case, then it might be time to make a move – or certainly to dig a little deeper on the manager’s strategy and current outlook.
Look for long-term offenders
All long periods of underperformance start with a short period of underperformance. Look out for funds that have consistently underperformed their own benchmarks or been outshone by similar funds for more than just a couple of quarters. For instance, the regular ‘dog funds’ report by Bestinvest classifies ‘dog’ funds as those that have delivered worse returns than their benchmark for three consecutive 12-month periods, and to have underperformed by 5% or more over those three years.
Are you diversified enough?
Diversification has always been key to a long-term investment process. That doesn’t mean buying up a long list of funds, however. Instead, you want your investments to be spread across a range of different assets, regions and industries, to ensure that even if one area you invest in loses value, you’re still invested in other areas that are doing ok.
Does it still reflect what you want from it?
Remind yourself of why you’re investing and what you want from your portfolio. What are your short-, medium- and long-term goals? What level of risk are you comfortable with taking? Has anything changed in your general financial position that affects how you want to invest?
Factors such as your age, health and family circumstances change over time, so a regular review should factor in the impact of those developments. Reviewing your goals when necessary will help you stay focused and on track.
Has it drifted?
If you haven’t checked your portfolio for a while there’s a chance you haven’t noticed its composition shift over time. For example, when stock markets are rising the equity parts of your portfolio will go up in value too, leading those equity parts to account for a bigger slice of your portfolio than previously. This isn’t usually an issue, as markets rise and fall over time. But if you haven’t been keeping tabs on your portfolio it may have drifted away from your initial asset allocation and therefore needs rebalancing.
Does it still reflect your risk profile?
There’s a chance that if you’ve been invested for a while, your risk appetite might have changed over time. If that’s the case, check your portfolio is still in line with the level of risk you’re comfortable with taking. Factors such as your age, objectives and circumstances change over time too, so a regular review should include thinking about the impact of such changes.
Most investment platforms offer free online risk calculators and profiling tools, while many platforms have a choice of risk-based ready-made portfolios and investment selections.
Resist selling out
The reality is that one of the worst times to sell your investments is after the market has downturned. Investors who have stayed the course over the long term have typically been rewarded for their patience. Giving in to emotions such as fear, anxiety and greed can cause more problems for your investment portfolio than any stock market falls. Read about the behavioural biases that can get in the way of successful investing.
Fund manager moves
If any funds you own have seen a manager change since your last review, then do some homework about the replacement. Look for information about how they’re running the fund and if they have stuck with the existing investment process. This should help you judge whether you want to remain invested. This article on researching funds identifies some of the resources you can use when you want to know more about particular funds.
Keep an eye on costs
Don’t switch funds and keep tweaking your portfolio for the sake of it – you’ll be racking up trading costs as well as the time and effort spent moving your portfolio around. Additional charges for trading activity and fund transfers can eat significantly into your long-term returns.
Check you’re using the right investment platform
There’s loads of platforms out there these days, and they vary in their approach. The market ranges from full digital investment services for investors who don’t want to make their own decisions, to DIY platforms for those who want to choose and manage their own investments.
So, have a think about what you need from your platform and use our free comparison tools to choose a platform that suits your preferences, needs and circumstances.
Photo by Markus Winkler on Unsplash
