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New financial year is the time for a portfolio health check

Nicki Bourlioufas  |  29 Jun 2018Text size  Decrease  Increase  |  
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The start of the financial year is an ideal time to examine your portfolio to check whether it is on track to meet your lifestyle needs.

A regular review will ensure that asset allocations in your portfolio remain weighted according to your financial needs, risk tolerance levels, and circumstances beyond your control.

“Reviewing your portfolio regularly is key if you are looking to stay on track with your long-term goals,” says James Ridley, a planner with Atlas Wealth Management.

“We rebalance so we don’t become overly dependent on either the success or failure of any one investment or asset class. With market conditions changing year-to-year and different sectors performing accordingly, it is likely that you are either overweight and underweight in some asset classes and specific holdings. To address this, it is important to review those holdings and perform a rebalance,” Ridley says.

James Brown, a financial planner with countplus one, says reviewing allows investors to take profits on assets which may have run up in price.

“Often it is a certain asset class which has had a run and we would look to reallocate some of these funds into another asset class to ensure a well-diversified portfolio and within the target risk allocation the client is comfortable with,” says Brown.

Scott Keeley of financial planning firm Wakefield Partners says investors should review their portfolio every year.

“It is rather like having a regular health check, to ensure that your investments are in healthy shape and can continue to meet your needs for income and capital growth.

“This does not mean that the investments need to be turned over or changed on a regular basis. If they are good quality blue chip investments, then they can be held for the long term. However, there are some pitfalls which investors often fall into,” says Keeley.

financial health EOFY financial year medical doctor

“Some clients become emotionally attached to particular investments. This may be the case if the investments have performed very well. In some cases, a particular investment may grow to become the substantial part of a portfolio. This will then create a far greater level of risk for the portfolio should the investment subsequently underperform or fail.”

Paul Resnik, co-founder and director of risk tolerance firm FinaMetrica, says investors should ask three key questions.
First, will your portfolio meet your financial needs if it delivers the expected returns? Second, “will it meet your financial needs in the unusual, but predictable circumstances of a deep and prolonged market correction, which happens every ten years or so?
Finally, is the portfolio consistent with performance expectations revealed in the assessment of your risk tolerance?

“If you can’t confidently answer each of the three questions then it’s time to review your portfolio,” says Resnik. He adds that an investor’s risk tolerance doesn’t vary with market conditions and is a personal trait, depending on how comfortable a person is with financial risk.

“The belief that risk tolerance varies with market news and reduces with age is simply not true. For most us it doesn’t change materially from early adulthood to and through retirement.”

While percentage allocations to asset classes will be different for a conservative investor compared to an aggressive investor, they still need to be reviewed.

“As a general rule, the longer the time frame of investing the greater your exposure will be to growth assets. We rebalance so we don’t become overly dependent on either the success or failure of any one investment or asset class,” says Atlas’s Ridley.

According to Wakefield’s Keeley, some older portfolios that haven’t been reviewed for a long time can be overweight banks and resources, and have little exposure to healthcare, transport and infrastructure, and other opportunities.

“While the banking sector may offer security and attractive income yields, some of these emerging sectors could offer excellent prospects for capital growth in the future. It is important that investors review their portfolios and consider the introduction of some of the newer companies from these emerging industries,” says Keeley.

Other factors to consider when reviewing include your investment time horizon, risk tolerance, diversification, expenses in investing and what investment vehicles you will use, such as shares, ETFs or managed funds and tax considerations. “When we are rebalancing, it is crucial to consider what kind of capital gains and losses we are crystallising, because where possible we want to be tax efficient,” says Ridley.

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Nicki Bourlioufas is a contributor to Morningstar Australia

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is a Morningstar contributor.

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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