We’ve come into the new Financial Year, where many investors have sat down to review their portfolios. I’ve written an article on a few ways to check on your progress in my article, Are you wealthy?.

Although now is a good time for a full portfolio review, there are 3 simple portfolio sense checks that can make sure that you are not adding unneeded risk or exposure to your portfolio.

Step one: Check your asset allocation

I write about asset allocation. A lot. It’s for a good reason, it determines 100% of your return.

If you have a comprehensive investment strategy in place, you will have target allocations for asset classes, based on the goals of your portfolio. During your portfolio evaluation, compare your target asset allocation with the current asset allocation of your portfolio. This will form the basis for a decision around rebalancing.

There are two theories around rebalancing. The first is that you pick a set interval. For example, you might choose annual. You look at your portfolio and get it back aligned from an asset allocation perspective.

The second theory is that you instead use tolerances. You may set a 10% tolerance which means that if your goal is to have 60% allocation to equities and it gets to be more than 66% you would rebalance. Another version of this is choosing a range. You may have a goal that stipulates that you have 60-80% allocation to equities. In both these cases you are trying not to do it too often as your portfolio will naturally fluctuate.

The reason that you don’t want to rebalance too often is because rebalancing has a downside. There are transaction costs and there are likely taxes as you sell things that have gone up in value. Any buying or selling should be limited to set intervals throughout the year.

Step two: Check your costs in and out of your investments

High fees and transaction costs erode your investment returns and your total returns. Unfortunately, fund managers and investment product companies are not bound to keep their fees static for the lifetime of the investment.

Luckily for us, there’s been a lot of pressure on fees to come down for investments and that has been the general trend. This doesn’t mean that we can sit idle and trust that this is what is happening.

Businesses, just like individuals, face the rising costs of products and services with inflation. This means that management, administration, service fees and product costs can rise. Although you are entitled to be notified, this can slip through the cracks in the whirlwind of everyday life. Check in and make sure that you’re on top of the brokerage you pay for trades, investment and management fees you pay, any professional services fees.

Related to this, understand how you are managing costs. I speak to this in detail in my article ‘Are you Wealthy’, but it is important to understand whether and why your costs have risen year to year. A way to measure this is cashflow Year-on-Year. Sometimes rising costs are inevitable, but it is important to sense check whether it is unavoidable costs or whether it is lifestyle creep.

Step three: Check your cash flow

If you’re in retirement, understand whether you have enough cash in your portfolio to service your spending needs and provide you with peace of mind. Your cashflow needs don’t remain stagnant and change year to year. Here are some questions to ask:

  1.  Have you got enough of a reserve to cover your expenses and avoid selling assets you don’t want to in a downturn?
  2. Do you have any large lumpy expenses that are coming up that you don’t usually have to account for? Are you helping out with school fees for grandchildren, going on an international trip or have an upcoming home repair?

For investors who have not reached retirement yet, do a check on your cash reserves. Do you have a fully funded emergency fund, and have your emergency fund needs changed? Do you need to bolster it if your circumstances have changed – you might have expanded the family, taken on a mortgage or your cost of living may have increased. Make sure you are adequately self-insured.

If you’ve received a bonus, a healthy tax return or a pay rise, look at whether you are holding onto too much cash, and whether that can be put to work over the long term instead of being eroded by inflation.

Reviewing your portfolio? I’ve written an article here on how to do it. We’ve also got a step-by-step guide from Christine Benz.

Invest Your Way

For the past five years, Mark and I have released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

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