Spring cleaning your portfolio

Peter Seamer, Investment Director at Psigma Investment Management, explains how the professionals go about spring cleaning clients’ portfolios to ensure everything is on track.

Why the portfolio review is a critical part of your investment strategy

We often speak with investors who are concerned about short-term market fluctuations and how the value of their investment portfolios have been, or may be, affected as a result. Smaller movements happen on a daily basis and monitoring your portfolio as often as this will not give you a fair indication of how your portfolio might perform in the long-run.

After all, investing is a long-term activity and should be viewed as such. A better way to assess your portfolio is to have an in-depth review once or twice a year under the guidance of a professional investment manager such as Psigma.

Think of the portfolio review as a health-check or an opportunity to spring clean your investments

Conducting a portfolio review means undertaking a full examination of your investments and assessing whether their composition, performance and risk-profile still support your future goals. It is not just about examining each asset in turn, but also taking a holistic view including whether you are taking on too much or too little risk and of what type of risk your portfolio is exposed to.

Conducting a portfolio review means undertaking a full examination of your investments and assessing whether their composition, performance and risk-profile still support your future goals

The review is not just an opportunity to get an update on whether your portfolio is behaving in line with your expectations, but also for you and your investment manager to check in with each other, evaluate your current personal and financial circumstances, and assess whether anything major has happened in your life.

If anything has changed, it is important to pass this information on to your investment manager so that any necessary changes can be made to your investment strategy. Even small things in your life, that may seem irrelevant to your investment portfolio, are worth mentioning because sometimes changes do not happen overnight, but are more incremental and add up over a longer period of time.

Market movements will affect your portfolio’s risk

What determines your portfolio’s risk level and absolute value is the weight of allocation made to each asset and, by extension, the asset class you are invested in.

A portfolio invested in 100% equities will perform very differently to a portfolio invested 100% in bonds, both in terms of the value of the portfolio, and the volatility it will exhibit.

When markets fluctuate, the different asset classes in your portfolio will be affected differently. Some asset classes will increase in value, and some will decrease. This in turn will affect their composition in your portfolio, and hence its overall risk level.

When markets fluctuate, the different asset classes in your portfolio will be affected differently. Some asset classes will increase in value, and some will decrease. This in turn will affect their composition in your portfolio, and hence its overall risk level

For example, imagine that the first time you construct a portfolio, your overall situation suits a portfolio made up of 40% equities and 60% bonds (we are sticking to two asset classes in this example, for explanatory purposes and simplicity’s sake. However, an investment portfolio is often made up of more than this).

After a period of six months you meet with your investment manager for a portfolio review. When you look at how markets performed, it turns out that equities did very well, and bonds did not.

Therefore, the value of the equities in your portfolio has increased and the value of bonds has decreased. As equities have increased in value, their weighting has also increased; conversely as bonds have decreased in value, their weighting has decreased. Your portfolio’s new asset class composition is made up of 60% equities and 40% bonds.

Top Tip

All portfolios should be regularly reviewed for their composition, risk-profile and performance, but you should also review your provider regularly too. It is healthy to periodically compare your wealth manager to its peers to ensure you are getting the best possible deal in terms of returns, fees and service.

Lee Goggin - Co-Founder

Lee Goggin

Co-Founder

Why should you review your portfolio for the long term?

Most industry experts would recommend reviewing your portfolio every six to twelve months. As mentioned above, investing is for the long term, not a daily, weekly, monthly or even quarterly basis. Having a review once or twice a year allows enough time to assess the underlying performance indicators. In between these review meetings it is the role of your discretionary manager to proactively make investment decisions on your behalf, within the confines of the risk parameters you have agreed with them. This is also why the general recommendation is to invest for a minimum of five to seven years: to allow the performance of your portfolio to reflect the long-term drivers behind the investments’ returns, rather than the markets’ more random day-to-day movements. If you employ an investment manager, their job is to monitor your entire portfolio continually and make changes where necessary to keep it in line with its risk strategy and your investment objectives.
Having regular six-monthly or annual reviews with an investment manager is an important part of keeping the strategy of your portfolio aligned with your objectives, but the priority should always be to ensure that the risks inherent in your portfolio are appropriate for you
Many of the daily fluctuations in asset markets normalise quickly. What is important is the cumulative impact these movements may have on your investment portfolio and whether it remains commensurate to your appetite for risk and desired return. Having regular six-monthly or annual reviews with an investment manager is an important part of keeping the strategy of your portfolio aligned with your objectives, but the priority should always be to ensure that the risks inherent in your portfolio are appropriate for you. Of course, if you have decided to use a discretionary investment service, your investment manager will be reviewing your portfolio more frequently. It is their job to review and monitor your investments in line with the risk and return parameters we have discussed. We believe performing regular reviews, staying informed and factoring in any personal change should be a critical part of your investment strategy.

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