A New Year Portfolio Check-In Guide

With 2020 upon us, many investors may be reviewing their portfolio’s 2019 path and mulling over possible adjustments for this year. If you are one of them, here are some factors we think are worth considering.

1. Review your asset allocation—the mix of equities, fixed interest securities, cash or other securities in your portfolio.

If you have multiple investment accounts, we suggest doing this for each to arrive at your overall asset allocation. For those owning equity or fixed interest funds, note that their contents might not be apparent from their name (e.g., “Balanced Growth”). Perhaps examine the individual securities they contain to see what asset category (or categories) they belong to. If this information isn’t already included in the statements the fund provider sends you periodically, you should be able to contact them and request it.

2. Review the factors underpinning your asset allocation.

We think these factors should include your investment goals—the primary purpose(s) for your money—as well as your cash flow needs (planned portfolio withdrawals), risk tolerance (which we define as your comfort level with the potential for equity market declines) and time horizon (which we define as the length of time you must invest your assets in order to maximise the likelihood you reach your investment goals).

To see how these may influence your asset allocation, consider an elderly investor with limited life expectancy who lives modestly and doesn’t plan to leave an inheritance. Their lifestyle, time horizon and goals seemingly don’t require as much portfolio growth as a younger, active retiree who wishes to travel the world and fund their grandkids’ education. Fixed interest securities might play a bigger role in the former person’s portfolio, since they tend to be less volatile than equities over shorter time periods.[i] But they also lack equities’ growth potential, in our view. Hence, we think investors whose goals require long-term growth likely should hold some equities.

To assess the need for potential changes, we think it can be helpful to ask and answer the following questions. During the past year (or since you last reviewed your financial circumstances):

• Did you receive any major health news, positive or negative?
• Did you marry, divorce or lose your spouse?
• Did you discover you are depleting your savings faster than anticipated?
• Did you experience a large one-time expense or windfall?
• Alternatively, do you have reason to believe next year’s expenses will differ from 2019’s?
• Did your investments’ purpose(s) evolve?

Although this list isn’t exhaustive, if you answered “yes” to any of these questions, we think it might be worth revisiting your asset allocation and seeing if it still matches your life circumstances and investment goals.

3. Compare your portfolio’s sector and country exposure against a benchmark to see where (and how much) it deviates. This could indicate over-concentrations in certain areas, which we think can heighten risk.

We define a benchmark as a broad equity or fixed-interest index that serves as a model for constructing a portfolio, managing risk and assessing portfolio performance. For example, we think the MSCI World Index—a global index covering 23 developed countries’ equity markets—is an excellent benchmark for the equity portion of many global investors’ portfolios. You can use a benchmark to assess whether your portfolio is highly concentrated in any category—be it a country/geographic area, equity market sector, individual company or something else. Heavy concentrations can increase risk and limit your investment opportunities, in our view. So whilst we think it is fine to hold more of the categories you expect to do well (and vice versa), we would caution against holding far more or less of any category than appears in your benchmark. Doing so likely raises the risk of a rough stretch in that area of the market sinking your portfolio’s returns, in our view.

Below are a couple ways to spot if your portfolio is insufficiently diversified. Whilst they are geared towards equities, we think diversification matters for fixed interest holdings, too. A large position in a single issuer’s debt securities—or even in a single issuer type—brings risk worth mitigating, in our view.

• Does your home country figure in prominently?

In our experience, many people feel most comfortable (or most patriotic) investing primarily in domestic assets. But we think this may mean skewing your portfolio towards a few sectors or even companies. This is the case even in many developed European markets. For example, 44.1% of the MSCI Belgium—which covers 85% of Belgium’s equity market—is comprised of Consumer Staples firms, thanks largely to a single brewing company’s 42.1% weight.[ii] For comparison, the sector is 8.4% of the MSCI World Index.[iii]

• Does a single company account for a large portion of your holdings?

We have seen many investors disproportionately favour their employers’ shares, perhaps because the company is familiar or they believe the company is sure to succeed. In addition to a very large position violating the principles of diversification, we think tying both your income and investments to the same company means its fortunes could singlehandedly dictate your financial well-being. In our view, investors are likely better off diversifying.

A key addendum: Diversification isn’t set-it-and-forget-it, in our view. Just because your portfolio used to be modelled on a certain benchmark doesn’t mean it still is today. Over time, securities with high returns can build up a larger portfolio presence than you intended. Rebalancing—paring high-returning holdings and adding to lower-returning ones to keep your allocation on target—is a helpful tool here, in our view. To identify rebalancing opportunities, we suggest checking for big disparities in the percentage any share (or equity category) comprises of your portfolio versus its percentage in your benchmark.

4. Check your emergency fund.

This is a store of cash or cash-like securities you can draw on if money is tight. If you withdrew from it last year, consider replenishing it soon. Emergencies are inherently unpredictable, in our view. Hence, we think it is likely best to prepare now for possible future ones.

5. Beyond your portfolio’s components, consider your expectations for this past year and whether they panned out.

If you anticipated fear over Brexit or US President Trump’s new tariffs would bring a global recession, recognising they haven’t may be painful—but we think it is still fruitful. Errors are universal—part of being human. So, in our view, is the desire to ignore, forget or rationalise them. But we think this forgoes a powerful learning tool. In our experience, understanding past mistakes can help you identify and avoid similar pitfalls in the future.

Interested in planning for your retirement? Get our ongoing insights, starting with your free copy of The Definitive Guide to Retirement Income.

Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: 2nd Floor, 6-10 Whitfield Street, London, W1T 2RE, United Kingdom.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

[i] Source: Global Financial Data, as of 9/10/2019. Statement based on US 10-Year Treasury Debt Security Total Return Index and S&P 500 Total Return Index, in USD, 31/12/1925 – 30/9/2019. US returns used in lieu of global due to their longer historical dataset. Currency fluctuations between the dollar and pound may result in higher or lower investment returns.

[ii] Source: FactSet, as of 9/12/2019. MSCI Belgium Index and constituent market capitalisations.

[iii] Ibid. MSCI World Index and constituent market capitalisations.