The importance of keeping your portfolio under review

By September 16, 2021Investments
Man and woman at tablet device reviewing finances

Investing for the long term is a mantra that most investors understand, and therefore selecting good performing investments, and deciding on an appropriate asset allocation at the outset of any investment strategy, are fundamental to how the portfolio will perform in the early stages.

However, whilst the initial portfolio may well be appropriate for the conditions of the day, the world keeps turning. As the saying goes “nothing ever stays the same” and that is certainly true for investment markets. It is also the case for our lives, where our priorities, goals, and objectives change over time. For these reasons, reviewing an investment portfolio and strategy on a regular basis is key to ensuring the strategy remains current and appropriate in achieving those objectives.


Investment cycles

One of the main reasons we recommend regular reviews is that market economies revolve around an investment cycle, which means that underlying investment conditions are always evolving. In very simple terms, economies start to grow and move out of recession and then expand to a peak. At this point, the economy becomes overheated leading to a downturn, and eventually falls back into recession and then the cycle starts again. Of course, the mechanics of market economics are far more involved than this, and many factors can affect the length of each economic cycle, the severity of a recession, or the pace of growth during the boom years.

Think back over the last 25 years, and the different market conditions we have seen over that period, from the over-exuberance of the Dot Com boom at the turn of the Millennium to the depths of the Financial Crisis of 2007-2008. Over this time, we have seen very different conditions, from periods that are friendly to risk assets, to times where taking a more risk-averse approach is appropriate to protect portfolio values. And these can change at varying speeds, with the rapid plunge into recession at the start of the COVID-19 pandemic being a recent example.

Clearly, any given investment portfolio is unlikely to perform well in all of these different conditions, and therefore it is important to make sure your portfolio structure is well suited to the conditions of the day and those that are expected to follow, by reviewing the investment mix, structure, and assets held. Simply holding the same basket of investments during all these conditions is unlikely to be optimal and could lead to underperformance over time, together with exposure to higher levels of risk.


Keeping peak performance

Just like economic trends, choosing the right investments is a decision that needs to be revisited regularly, particularly when funds are actively managed. Over the years, fund managers’ reputations are built on their performance, and some achieve star status, having outperformed a particular sector consistently or achieving a stellar performance over a short period of time. But reputations can be damaged just as quickly, and the fund management industry is littered with names of former star managers who have fallen out of favour with investors. Similarly, individual fund managers often move between fund houses and fund objectives can alter significantly over time from their initial brief. In short, following an individual fund irrespective of performance is not likely to achieve a good outcome, and by regularly reviewing your choice of investment funds, underperformance can be weeded out with better performing funds taking their place.


What is your goal?

Every investor has a goal at the outset of an investment strategy. They could be looking to build a long-term investment fund towards retirement, start saving for children’s university costs, or generating an income in retirement. Each of these life stages has different priorities and a single investment approach is unlikely to be suitable for each stage. By keeping the investment strategy, fund choice and approach under regular review, you can help ensure that the appropriate funds are held in your portfolio to help achieve the goal at that particular stage in life.


Tax rules

Over the years, successive governments have made significant changes to the way investments are taxed, and introduced several different tax wrappers, from the TESSA to the ISA, Junior ISA, and Lifetime ISA. By regularly reviewing the structure of your portfolio, as well as the investments, you can take advantage of the most tax advantageous investment approach or undertake a re-structure to make a portfolio more tax-efficient in light of changes to rules and legislation.


Achieve your (re)balance

In a well-tended garden, plants that thrive begin to dominate their space and encroach on others. This is why regularly pruning and re-shaping is needed to keep the space tidy. The same is true for investment portfolios, where funds that perform well get bigger and take on a greater proportion of the portfolio. This can often lead to an increase in risk, and portfolios can quickly move out of line with the original goals and objectives.

By ‘rebalancing’ a portfolio, any positions that have grown too big can be pruned back into shape; however, a good rebalancing exercise needs to adopt a methodical approach, taking into account relevant factors before deciding to proceed.


Time for a review?

Many factors, such as underlying economic conditions, individual fund performance, and changes in circumstances, can knock a particular strategy off course; however, reviewing investment portfolios and strategies regularly can be beneficial in helping you to achieve those ultimate goals and objectives.


If you are interested in arranging a review of your existing investment portfolio or strategy with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.