Last Updated on 21st June 2023
Every investment portfolio should be subject to periodic reviews and additional assessments whenever a change in your plans or circumstances may require an adjustment to your investment strategy.
In this article, we have summarised the five steps fundamental to an effective portfolio review, which apply to any appraisal process – whether you are sitting down with a Chase Buchanan adviser or assessing your portfolio independently.
Our comprehensive portfolio reviews provide meaningful insights into your returns, fund performance and long-term projections.
During the review process, we can also discuss how well your portfolio adheres to your expectations and explore potential opportunities of interest to keep you in full control of your wealth and finances.
Step 1: Evaluating Asset Allocations
Most investment portfolios include varying asset classes as a way to diversify. Mixing asset classes avoids an excessive risk level associated with investments solely within one category – which could be exposed to simultaneous downturns.
Example asset classes could include property, cash, equities and fixed-interest products, although that is far from an exhaustive list.
Asset allocations require review because your blend of funds may need to be adjusted if your goals or approach to risk have changed – or if the underlying risk associated with your assets has increased or decreased.
If you are investing for the long-term, such as building a retirement fund, you are likely to have a lower-risk approach. Any over-exposure to higher-risk assets, such as equities, needs to be addressed by replacing an investment with an alternative fund or using a hedge to offset the risk.
The opposite may apply if you have a shorter-term financial investment plan and wish to identify ways to improve your returns and find the best-performing financial instruments currently available.
Step 2: Reviewing Equity Investment Sectors
Just as diversification between asset classes is a method of managing portfolio risk, you should also analyse your equity holdings to evaluate any weighting within a specific sector.
For example, if the bulk of your equity assets are held in financials, utilities or a particular commodity and the market weakens, it could have a disproportionate impact on your invested wealth.
Your financial adviser should provide guidance about which sectors or industries offer advantageous returns during each review based on their knowledge of the markets and average yields.
It may also be that you prefer or dislike certain sectors based on your own experience or preferences. Your adviser can adjust your portfolio accordingly or recommend options that suit your requirements.
Step 3: Analysing Global Investment Apportionment
Following asset class and sector diversification, we’d next look at your equity exposure between different global markets. Although equities held in established markets generally return higher yields, there may be other opportunities in emerging markets.
We often see a heavy focus on developed markets, which can mean a riskier weighting, which could be mitigated with exposure to alternative regions.
Clients investing as a financial retirement strategy, or those that have already retired, may wish to reduce their equities in emerging markets in return for higher returns – but the right solution very much depends on your individual circumstances.
Step 4: Assessing Fixed-Income Funds
Fixed-income bonds can be a low-risk opportunity to offset other higher-risk products or invest in a secure financial instrument – but their viability also fluctuates with interest rates.
Another factor is debt quality, with some bonds offering high yields and positive inflows but with lower quality used to provide greater returns, which presents an underlying risk not to be ignored.
An investment portfolio review should thoroughly assess all bonds or other fixed-interest products to ensure they are suitably diversified and aligned with your plans.
Step 5: Calculating Cash Reserves
A professional portfolio review is an in-depth process considering your financial position, future aspirations and expectations, product mix and diversity and ongoing investment returns.
This tailored process is specific to your portfolio and circumstances. It should also look at cash reserves as an important part of a secure investment approach with flexibility built in to cover unexpected expenses.
The general rule of thumb is to have around three to six months’ worth of cash available in a quick-access account (rather than a high-yield account requiring notice to make a withdrawal).
However, that yardstick will not apply to everyone. Retirees are often advised to retain around one to two years’ worth of expenses in cash reserves to ensure their income position is secure and they have a contingency fund available in case of emergency.
Excess cash or other liquid reserves may indicate a need to invest further funds in your portfolio, in the asset class or market that supports diversification, rather than holding onto cash that provides minimal returns.
Inflation risks mean that most cash savings effectively fall in value, albeit gradually, because interest earnings are typically lower than those available on investment returns. Considering all of these elements of your finances will help you gain a solid overview.
The Importance of Investment Portfolio Reviews
Our knowledge section has further resources explaining why a portfolio review is a worthwhile exercise, including our article Is It Time You Had an Investment Portfolio Review to give you a better idea about how often you should expect a review – and those periods when we would recommend an additional portfolio appraisal.
Many investment clients either don’t realise the value of the review process or haven’t been advised that a review is a necessary part of managing an investment portfolio. Still, it could make a significant difference in your investment decision-making.
A full review ensures you know how your portfolio is performing, the level of risk you are exposed to, and anticipated timescales on returns.
During a review you also have time to ask questions, discuss forecasts, and make informed judgements about any necessary changes.
Please get in touch with Chase Buchanan at any time for more guidance about portfolio reviews or to schedule a convenient time to sit down with one of our capable consultants to take a closer look at your invested wealth