Reviewing Your Investment Portfolio: A Comprehensive Guide

Regularly reviewing your investment portfolio is crucial to ensure your investments remain on course and aligned with your goals and expectations. While the frequency of reviews depends on individual preferences, it is generally recommended to assess your portfolio at least once or twice a year, or when there are significant changes in your circumstances or the market. Here are some essential steps to guide you through the process of reviewing your investment portfolio effectively:

Evaluate asset allocation

Evaluating your asset allocation is a critical step in reviewing your investment portfolio. Here are some detailed instructions to help you through the process:

Determine Your Risk Tolerance:

Before investing, it's important to assess your risk tolerance, which refers to how much risk you are comfortable with in your investment portfolio. Generally, younger investors with a longer time horizon can tolerate more risk, while older investors approaching retirement may prefer a more conservative approach.

Diversify Your Asset Classes:

Diversification is a key strategy to manage risk and maximize returns. Spread your investments across different asset classes, such as stocks, bonds, and cash or money market securities. Diversification ensures that your portfolio is not overly exposed to the risks of any single asset class or investment.

Allocate Assets Based on Goals and Time Horizon:

Consider your financial goals and investment time frame when allocating your assets. For example, if you're investing for retirement, you may opt for a mix of stocks for long-term growth and bonds for income and stability. The proportion of stocks to bonds may depend on your age, with younger investors allocating more to stocks and gradually shifting towards bonds as they get closer to retirement.

Regularly Review and Rebalance:

Your asset allocation should not be a static decision. Review your portfolio periodically to ensure it aligns with your changing financial goals, risk tolerance, and market conditions. Over time, some investments may outperform others, requiring you to rebalance your portfolio to maintain your desired allocation.

Consider Subclasses and Alternative Investments:

Within the broad asset classes, there are subclasses to consider, such as large-cap, mid-cap, and small-cap stocks, international securities, emerging markets, fixed-income securities, real estate investment trusts (REITs), and more. Additionally, explore alternative investments like mutual funds, index funds, or exchange-traded funds (ETFs) to further diversify your portfolio.

Monitor Costs and Performance:

Keep a close eye on the costs associated with your investments, such as management fees and trading charges. Regularly review the performance of each investment to identify areas that may need adjustments. Monitoring costs and performance will help you make informed decisions about buying, holding, or selling specific investments.

Remember, the above guidelines provide a framework, but the specific allocation of your portfolio should be tailored to your individual circumstances, risk tolerance, and financial goals. Seeking advice from a qualified financial advisor can also help you make more informed decisions about your asset allocation.

Review equity investment sectors

Equity research is a critical function in investment banks, providing insights and recommendations to traders and investors. It involves analysing a company's financials, industry, competitors, and market trends to determine whether a stock is a buy, sell, or hold. This section will focus on reviewing equity investment sectors as part of the portfolio review process.

Understanding Sectors

Before reviewing equity investment sectors, it's important to understand what sectors are and how they are classified. Sectors are broad groupings of companies engaged in similar business activities. The Global Industry Classification Standard (GICS) is the primary standard for sector definitions, categorising companies into 11 sectors, which are further divided into industries and sub-industries. These sectors include Consumer Discretionary, Information Technology, Telecommunication Services, Consumer Staples, Healthcare, Financials, Industrials, Materials, Energy, Utilities, and Real Estate.

Reviewing Sector Performance

When reviewing equity investment sectors, it's essential to assess the performance of each sector in your portfolio relative to the broader market and its historical performance. Look at key metrics such as returns, revenue growth, earnings growth, and valuation multiples over different time periods. Compare the performance of your sector holdings to relevant sector indexes or benchmarks to identify areas of strength and weakness.

Sector Weightings and Diversification

Evaluate the weightings of each sector in your portfolio. Are you overweight or underweight in certain sectors compared to your desired allocation or a relevant benchmark? Diversification across sectors is crucial to manage risk. Ensure your portfolio is not overly concentrated in a few sectors, as this can expose you to sector-specific risks. The "five per cent rule" suggests keeping allocations to specialty sectors, such as biotech or gold miners, at or below five per cent of the total portfolio.

Sector Rotation Strategies

Consider sector rotation strategies to capitalise on market trends and economic conditions. Sector rotation involves shifting allocations between sectors based on their expected performance in different market environments. For example, defensive sectors like consumer staples and utilities tend to outperform during economic downturns, while more cyclical sectors like industrials and materials may outperform during economic expansions.

Industry and Stock Analysis within Sectors

Drill down into the industries and individual stocks within each sector. Assess the performance and prospects of the industries within a sector and identify potential investment opportunities or areas of concern. Review the fundamentals and valuations of the stocks in your portfolio relative to their peers within the sector. This will help you decide whether to increase or decrease your exposure to specific industries or individual stocks.

Monitoring Sector Trends and News

Stay informed about sector-specific trends, regulatory changes, technological advancements, and other developments that may impact the outlook for the sectors in your portfolio. Follow industry news, analyst reports, and company updates to identify potential risks and opportunities. This will enable you to make more informed decisions about sector allocations and specific investments.

By following these steps, you can effectively review the equity investment sectors in your portfolio, ensuring that your sector allocations are aligned with your investment objectives, managing risk, and capitalising on market opportunities.

Analyse global investment apportionment

When reviewing an investment portfolio, it is important to analyse your global investment apportionment. This involves looking at your equity exposure across different global markets. While equities in established markets tend to yield higher returns, there may be opportunities for growth in emerging markets.

• Diversification: Diversifying your portfolio across different global markets can help manage risk. A heavy focus on developed markets can result in riskier weighting, which can be mitigated by investing in alternative regions.
• Risk and Return: Clients investing for retirement or those who are already retired may opt to reduce their equities in emerging markets in favour of higher returns from established markets. However, this decision depends on individual circumstances, risk tolerance, and investment goals.
• Market Performance: Monitor the performance of global markets and stay informed about economic trends, political events, and other factors that can impact your investments.
• Tax Implications: Consider the tax implications of global investments. Different countries and jurisdictions may have varying tax laws, regulations, and rates that can affect your overall returns.
• Cost Analysis: Evaluate the costs associated with global investments, including management fees, transaction costs, and currency exchange rates. These costs can impact your overall returns, especially when investing in multiple markets.
• Long-Term Goals: Regularly review and adjust your global investment apportionment strategy to align with your long-term financial goals. This may include retirement planning, saving for significant purchases, or generating passive income.

Analysing global investment apportionment is a crucial aspect of portfolio management. By diversifying across global markets, investors can manage risk, capitalise on growth opportunities, and work towards their financial objectives. It is important to stay informed about market trends, seek professional advice when needed, and periodically review and adjust your global investment strategy.

Assess fixed-income funds

Fixed-income funds are an important part of any investment portfolio review. Fixed-income securities are considered to have lower returns and lower risk than stocks. They are debt instruments that pay a set level of income to investors, typically in the form of fixed interest or dividends. Government and corporate bonds are the most common types of fixed-income products.

Interest Rate Risk

Fixed-income securities are sensitive to changes in interest rates. When interest rates rise, bond prices fall, and vice versa. This is known as an inverse relationship. As a result, investors in fixed-income funds may face interest rate risk, especially if they need to sell a bond before its maturity date. In a rising interest rate environment, the bond would be worth less than the original investment, resulting in a loss.

Inflation Risk

Inflation risk is another concern for fixed-income investors. Inflation erodes the purchasing power of the interest or dividend payments received from fixed-income funds. In periods of high inflation, the real returns from fixed-income investments may be minimal or even negative. Inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), can help mitigate this risk by adjusting the principal amount with inflation.

Credit and Default Risk

Credit and default risk refer to the possibility that the issuer of the fixed-income security may struggle financially or be unable to make interest payments. This risk is higher for corporate bonds, especially those with lower credit ratings. Credit ratings from agencies like Moody's or Fitch can help investors assess this risk.

Diversification

Diversification is important when investing in fixed-income funds. Investors should consider a mix of different types of fixed-income securities, such as government bonds, corporate bonds, municipal bonds, and certificates of deposit (CDs). Diversification helps to balance risk and return and ensures that the fixed-income portion of the portfolio is aligned with the investor's goals and risk tolerance.

Maturity and Reinvestment Risk

Maturity and reinvestment risk refer to the possibility that an investor may need to reinvest the proceeds from a maturing fixed-income security at a less favourable interest rate. This risk is particularly relevant in a rising interest rate environment, where newer bonds may offer higher yields than older ones.

In conclusion, when assessing fixed-income funds, it is crucial to consider the various types of risks involved and how they may impact the overall portfolio. Fixed-income funds play a vital role in diversifying investments, preserving capital, and providing a stable source of income, especially for more conservative or risk-averse investors.

Calculate cash reserves

When reviewing an investment portfolio, it's important to calculate and consider your cash reserves. Cash reserves are the funds that individuals or companies keep on hand to meet short-term and emergency funding needs. They are useful when money is needed right away for a large purchase or to cover unexpected payments.

Recommended Amount

The general recommendation for cash reserves varies depending on individual circumstances. For individuals, it is typically advised to have three to six months' worth of expenses readily available in a quick-access account. This provides financial flexibility and security. However, retirees are often advised to retain a larger reserve of around one to two years' worth of expenses to ensure a stable income and contingency funds.

For companies, the recommended amount of cash reserves is similar, with financial experts suggesting that three to six months' worth of ordinary expenses should be maintained. This ensures the company can cover all expected and unexpected short-term costs without relying on credit card debt or additional loans.

Types of Cash Reserves

Cash reserves can take various forms, including checking accounts, savings accounts, money market funds, Treasury Bills (T-Bills), and certificates of deposit (CDs). These options offer high liquidity and quick access to funds, making them suitable for emergency funding needs.

Advantages and Disadvantages

While maintaining adequate cash reserves is essential, it's crucial not to hoard excess cash. Holding too much cash can lead to missed investment opportunities and generate lower returns compared to investing in stocks, bonds, or other asset classes. Therefore, it's important to strike a balance and ensure that your cash reserves are optimised for your financial goals.

Factors to Consider

When determining the appropriate level of cash reserves, consider your financial goals, risk tolerance, time horizon, income stability, and net worth. If you have a steady income and a low risk of unexpected expenses, you may require a smaller cash reserve. On the other hand, if your income varies or you work as an independent contractor, a larger cash reserve may be prudent to protect against income shortfalls or unforeseen costs.

Frequently asked questions