An annual investment review not only tells you how your portfolio has performed against your benchmark, but whether it’s time to make changes to your holdings. This could happen, for example, if some investments in your portfolio have done exceptionally well and have consequently tilted your asset weighting in that sector beyond your target level. To conduct a portfolio review, at a minimum you need to look at four key areas.
1. How assets are allocated
Assets fall into three key groups: safety, income, and growth. The weight that each group commands in your portfolio largely determines the return you can expect and the risk that you’re accepting over a given time. If that allocation is skewed by extraordinary gains or losses in one class or another over the year, your risk profile will change. For example, if fixed-income has outperformed, the overall value of that asset class will have increased and may now be overweighted in your portfolio. But because fixed-income is considered more defensive than equity, that means your overall risk profile has become more defensive, perhaps more than you wish. Review your asset allocations annually to ensure your portfolio risk profile hasn’t drastically changed.
2. Are you diversified?
Review your portfolio to ensure sufficient diversification in each main asset class. Diversification is at the heart risk mitigation. It doesn’t make a lot of sense to hold only one bond in your fixed-income class and only one stock in equity. Review your portfolio annually to ensure individual asset classes contain a sufficient number of diversified individual securities to provide good diversification. In fixed income, for example, you’d spread weightings among federal, provincial, and corporate bonds. And in equities, you’d diversify by sector, by region, by capitalization, and so on to achieve your desired risk level.
3. Review individual securities
When researched, analyzed, and selected properly, individual stocks and bonds within a portfolio work in harmony to achieve a specific purpose, say a minimum dividend yield or a specific target price gain or a specified yield to maturity. When that target has been achieved, the position is usually analyzed to determine whether a switch or change within the portfolio is needed. Sometimes this is done at year-end in conjunction with generating tax losses to cover capital gains.
4. Review investment funds
If you’ve diversified by investing in mutual funds (for active management) or exchange-traded funds (to take advantage of low-cost passive holdings), review your funds’ performance over the past year and compare it with your investment rationale. Have there been changes in fund management or mandate (in the case of mutual funds) or to index methodology, liquidity, or ownership (in the case of ETFs)? Investment funds are frequently closed, merged, and renamed. Make sure such funds still deliver what you expect. If not, consider switching.
Beware of tax consequences
Bear in mind that rebalancing portfolios through asset sales may have unintended tax consequences or other unwanted effects. And remember, your objective is not to remake your portfolio but to restore it to a state where it continues to meet your time horizon, risk tolerance, and return objectives. If your portfolio has outgrown your ability or desire to manage it, consider consulting a qualified independent financial planner to help you work through the review process.
Courtesy Fundata Canada Inc. © 2015. Robyn Thompson, CFP, CIM, FCSI, is president of Castlemark Wealth Management. This article is not intended as personalized advice.
