Five-minute guide to reviewing your portfolio
Vital life events tend to reflect on our investment portfolio: the arrival of a child perhaps, or moving house, impending marriage or divorce. However, just as we routinely MOT our cars, we should do the same with our nest eggs.
Q: When should I do a review?
Review your savings and investments when you receive your six-monthly statement, and make a pledge to carry out regular reviews.
Q: Why should I reassess my investments?
Failing to review investments is the most common mistake made by investors; they invest in a fund and then simply forget about it. It's crucial that the performance of your funds is reviewed regularly.
Times change and so do wider economic circumstances; managers move on and investments can go off the boil. Your personal circumstances will also change.
Q: How do I know when to switch?
Define your goals. Do you need capital growth or income at present? Are you approaching retirement and looking for a less risky portfolio?
Fund performance is also an issue. Compare the current performance of your fund with its sector average and benchmark index. This is easy to do on a comparison site such as iii.co.uk or trustnet.co.uk.
However, it's important to recognise that even the best funds and managers can go through periods of under-performance. It doesn't necessarily mean you should move.
A look at current 'dog funds' lists, such as Bestinvest's Spot the Dog (bestinvest.co.uk), could help you decide whether to hold on or switch.
Q: What should my portfolio look like?
As ever, balance across asset types – cash, bonds, property, UK and international equities – is the key. Spreading the risk means your portfolio is less likely to be seriously damaged by any particular poorly performing fund or asset type.
For example, if you're in your thirties, with time to ride out stockmarket volatility, you might have around 70% of your portfolio in equities, with the remainder in cash, bonds and property.
Q: What charges might I face?
But to get a more accurate idea of the costs coming out of your investment, look at the total expense ratio, which includes other annual expenses.
Watch out for funds with performance-related charges that kick in when the manager has met a particular goal. A fund needs to produce consistently strong performance to justify high or additional charges.
The easiest way to keep initial charges (typically 5% when you buy a fund) down is to use a fund supermarket such as Insteractive Investor or Fidelity FundsNetwork. Switching funds within supermarkets is usually also cheap.
Q: What else should I watch out for?
Be aware of manager moves. In an active fund, where the manager is picking and choosing stocks, you really need to consider whether to take action if he moves on.
If your fund is underperforming, it may just be that the manager's style or the fund's brief is working against it in the current market. This doesn't necessarily mean you should switch funds.
Q: What traps should I be aware of?
Some big-name fund groups spend more on marketing than they do on getting their performance right, so look beyond the name.
Another thing to be wary of is following fashions – trendy funds may be worthwhile investments, but make sure you retain a properly balanced portfolio.
Assessing your risk profile
Broadly, investors can be classified as risk-averse, medium-risk or adventurous. Risk-profiling tools can be found on websites such as financialplanning.barclays.co.uk. Questions you'll have to consider include:
- Are you willing to risk a significant amount of your wealth in order to get a good return?
- Would you still consider making risky investments even if you made a significant loss on an investment?
- Compared with other people, are you prepared to take higher financial risks?
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
Also known as index funds, tracker funds replicate the performance of a stockmarket index (such as the FTSE All Share Index) so they go up when the index goes up and down when it goes down. They can never return more than the index they track, but nor will they lose more than the index. Also, with no fund manager or expansive research and analysis to pay, tracker funds benefit from having lower charges than actively managed funds, with no initial charge and an annual charge of 0.5%.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
A standard by which something is measured, usually the performance of investment funds against a specified index, such as the FTSE All-Share. Active fund managers look to outperform their benchmark index. Cautious fund managers aim to hold roughly the same proportion of each constituent as the benchmark, while a manager who deviates away from investing in the benchmark index’s constituents has a better chance of outperforming (or underperforming) the index.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.