Just as a basketball coach relies on their playbook to navigate high-pressure moments, this column explores the frameworks, principles and behaviours that help investors make better decisions in their investment journey.

Many investors can explain why they own each investment in their portfolio. Far fewer can explain how those investments work together to achieve their financial goals.

That’s understandable. Portfolios are built over decades. Over a lifetime an investor might buy a share because it looks attractively valued, add an ETF to gain new exposure, or simply inherit new holdings from a family member. Each investment decision can make sense in isolation based on the context of when it was made.

The challenge isn’t simply choosing good investments. It’s ensuring those investments complement one another and collectively support your financial goals.

Over time, holdings grow, allocations shift and financial objectives evolve. An investment decision that once improved a portfolio may no longer serve the same purpose.

Portfolios are dynamic. Investments rise and fall, businesses evolve and investor objectives change. Regular portfolio reviews can help ensure your holdings continue to work together as intended.

Three simple questions can help investors assess whether their portfolio is working as intended: Am I making the same bet more than once? Does every investment still have a job? And has an investment changed the balance of my portfolio?

Am I making the same bet more than once?

Portfolio diversification is more than just a numbers game. A portfolio with 30 individual investments may look diversified on the surface. However, crossover between companies, industries and geographies can upend your efforts in lowering risk. Depending upon what you are trying to accomplish, the correlation between different investments can also matter.

Many investors won’t have the time or interest to calculate the historical correlation between different assets they own. The good news is there are telltale signs of highly correlated assets. Correlation tends to be higher among companies operating in similar industries, facing the same economic conditions or subject to the same regulators.

In Australia, a good example would be holding each of the big four banks. Their outcomes are highly correlated given they face the same regulatory and capital requirements. The major banks are also exposed to many of the same economic drivers which may mean investors end up concentrating risk within a single sector. If economic conditions deteriorate, all four holdings could come under pressure simultaneously, limiting the diversification benefits investors might expect.

The growing adoption of ETFs has created new diversification questions relating to portfolios. For example, an investor holding both a broad Australian sharemarket ETF and a dividend-focused ETF may discover that many of the same large banks and resource companies appear in both portfolios. Owning multiple ETFs can unintentionally increase exposure to certain stocks, sectors or regions rather than meaningfully improving diversification.

A portfolio with many investments may look diversified but if they all rely on the same factors for success, you’re effectively making the same bet multiple times.

Does this investment still have a job?

Every investment should serve a purpose within a portfolio. That purpose might be generating income, driving growth, preserving capital, providing diversification or ensuring liquidity.

Think of the initial purchase of an investment as a job interview. The investment must have certain characteristics that help you achieve your financial objectives. As the manager of your portfolio, it is vital to conduct performance reviews of each holding and assess if it continues to serve its intended purpose. As your goals change over time, it’s important to reassess whether each investment is still helping you achieve them.

For example, if your objective shifts from maximising long-term growth to preserving capital and generating retirement income it will have implications on your holdings. You may choose to reduce exposure to higher-risk investments and increase allocations to businesses with more predictable earnings, stronger cash flows and a history of returning capital to shareholders.

Companies are always evolving. A high growth company that fit your objectives previously may mature over time. Maturing businesses often return a greater proportion of profits to shareholders through dividends or share buybacks. That might mean the company no longer fits your objectives.

The strongest portfolios aren’t built by continually adding investments. They’re built by ensuring each investment still earns its place.

Has a successful investment changed my portfolio?

One of the more rewarding experiences as an investor is owning an investment that performs exceptionally well. However, successful investments can quietly reshape a portfolio over time.

When successful investors build a portfolio, they typically allocate weightings deliberately across different companies, sectors and geographies. As markets move, those allocations change. Strong performers grow into larger positions while weaker holdings shrink.

This creates an interesting paradox. The investment that contributed most to your success may also become your largest source of future risk.

Periodically interrogate your holdings including their weightings to ensure they still align with your long-term goals.

It is common to see investors overly focused on what they own without paying attention to how much they own. Yet portfolio outcomes are driven by both returns and the positions relative weight. Even a high-quality investment can introduce concentration risk if it grows large enough.

This doesn’t mean successful investments should automatically be sold. In many cases, long-term wealth is created by holding exceptional businesses for long periods of time. However, investors should periodically reassess whether their strongest performers have altered the balance of their portfolio.

A portfolio should evolve intentionally, not simply reflect whichever investments happened to perform best.

Wrap up

When reviewing a portfolio, investors often focus on whether each individual holding is still a good investment. However, try ask a different set of questions. Am I making the same bet more than once? Does each investment still have a purpose? And has a successful investment changed the balance of the portfolio?

The answers matter because portfolio outcomes aren’t determined by individual holdings. They are determined by how those holdings work together.

Remember that a good investment doesn’t always make a good portfolio.

Subscribe to get Tyger’s insights in your inbox