Don’t panic! But do review your portfolio some annual housekeeping to keep allocations on track

January 14, 2019 | Portfolio Review, Guest Post

Don’t panic! But do review your portfolio some annual housekeeping to keep allocations on track

An annual portfolio review not only tells you how your portfolio has performed against your benchmark, but whether it’s time to make changes to your holdings. This could happen, for example, if some investments in your portfolio have done exceptionally well or have not met expectations, and have consequently tilted your asset weighting in that sector beyond your optimal target level. To conduct a portfolio review, at a minimum you need to look at four key areas.

1. How assets are allocated

Assets fall into three key groups: safety, income, and growth. The weight that each group commands in your portfolio largely determines the return you can expect and the risk that you’re accepting over a given time. If that allocation is skewed by extraordinary gains or losses in one class or another over the year, your risk profile will change. For example, steep losses in equities may have underweighted that asset class and unduly skewed the weighting of your fixed-income holdings. But because fixed-income is considered more defensive than equity, that means your overall risk profile has become more defensive, perhaps much more than you wish. 

2. Are you diversified?

Diversification is at the heart of risk mitigation. It doesn’t make a lot of sense to hold only one bond and one stock. Ensure individual asset classes contain a sufficient number of diversified individual securities to provide good diversification. For example, you’d hold a mix of federal, provincial, and corporate bonds, further diversified by yield and duration. And in equities, you’d diversify by sector, by region, by capitalization, and so on, to achieve your desired risk level.

3. Review individual securities

With proper research, your individual stock and bond holdings work in harmony to achieve a specific objective, say a minimum dividend yield or a specific target price gain or a specified yield to maturity. When that target has been achieved, the position is usually analyzed to determine whether a switch or change within the portfolio is needed. 

4. Review investment funds

If you’ve diversified by investing in mutual funds or exchange-traded funds, review your funds’ performance over the past year and compare it with your investment rationale. Have there been changes in fund management or mandate (in the case of mutual funds) or to index methodology, liquidity, or ownership (in the case of ETFs)? Investment funds are frequently closed, merged, and renamed. Make sure such funds still deliver what you expect. If not, consider switching.

5. Beware of tax consequences

Bear in mind that rebalancing portfolios through asset sales may have unintended tax consequences or other unwanted effects. And remember, your objective is not to remake your portfolio but to restore it to a state where it continues to meet your time horizon, risk tolerance, and return objectives. If your portfolio has outgrown your ability or desire to manage it, consider consulting a qualified independent financial planner to help you work through the review process.

© 2019 by Robyn K. Thompson. All rights reserved. Reproduction without permission is prohibited. This article is for information only and is not intended as personal investment or financial advice. 

Robyn is a SeekAdvisor Qualified Advisor.

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