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Tips For Your 2022 Portfolio Strategy Review

Published 09/03/2022, 10:54
Updated 29/09/2021, 08:35

With 2021 in the rearview mirror, many investors are using the New Year as an opportunity to review their investment portfolios. Fisher Investments UK believes it is a good idea to review your portfolio strategy at least once a year to ensure it still aligns with your long-term investment goals. In this article, we’ll share a few tips to help you get started.

Review Your Asset Allocation

Performance may seem like a natural starting place for a portfolio review, but we think there are other factors you should consider first – like asset allocation. Asset allocation is a portfolio’s mix of equities, fixed interest, cash and other investments. Fisher Investments UK believes asset allocation is the primary driver of portfolio returns over the long-term.

Many financial professionals use age as the primary factor in determining your optimal mix of assets. Age is a key factor, but some over simplistic rules like “take 100 and subtract your age to derive the percentage of equites in your portfolio” can overgeneralize and fail to account for your personal financial circumstances. You should consider other important factors like health status, family history, income needs and investment goals.

Imagine two hypothetical investors that are the same age. Investor A has a pension, is in good health and wants to leave a legacy to their kids. Investor B has no pension, is not in good health and wants to spend all of their assets before they die. Although these two investors are the same age, they have unique circumstances and investing goals. Investor A would likely need a more growth oriented asset allocation featuring a higher percentage of equities. Investor B’s asset allocation would likely feature less equities focusing on short-term stability and cash flows. Personal circumstances can vary drastically, and your asset allocation should be tailored specifically to your needs.

Importantly, if your investment goals and financial situation have not changed from the prior year, you may not need to change your asset allocation. If your personal circumstances changed because of an event like loss of supplemental income, increased expenses or a change in health status, you may need to adjust your asset allocation accordingly.

Select a Proper Portfolio Benchmark

Selecting an appropriate benchmark to use for your portfolio review is an often-overlooked part of a prudent investing strategy. Benchmarks help you maintain proper portfolio diversification and assess portfolio performance. If your portfolio has deviated too far from your benchmark in any category, you may be taking on too much benchmark risk and may need to make portfolio adjustments to bring it back inline. Further, if you’ve decided a change in your asset allocation is appropriate, you may also need to adjust which benchmark you’re using accordingly.

Selecting the right benchmark primarily depends on the composition of sectors and countries of origin of securities in your portfolio. Multiple benchmarks may be applicable to different asset classes in your portfolio. In most cases, a proper portfolio benchmark is going to be a broad equity or fixed interest index, like the MSCI World, S&P 500, or ICE (NYSE:ICE) BofA 7-10 Year Corporate-Government Bond Index. For example, if most of your portfolio is concentrated in fixed interest, using an all equity index like the MSCI World wouldn’t make sense. Similarly, if the majority of your equity holdings are non-US based companies, the US-only S&P 500 is not an adequate benchmark. Selecting the right benchmark lays the foundation for successful investing and is one of the most important an investor can make, in Fisher Investments UK’s view.

Maintain Proper Diversification

After selecting a proper benchmark, the next step is reviewing your portfolio’s diversification. To achieve proper diversification you must own a wide range of securities from different countries, sectors and asset classes, which helps spread out investment risk and generally results in lower volatility. The logic being as one security goes up in value another might go down.

Too often, investors allocate a large portion of their portfolios to one security or sector they think will perform well – creating significant concentration risk. Securities concentrated in one sector tend to move in sync which can be very costly if you are wrong. For example, if utilities underperformed last year, and most of your portfolio was allocated to that sector, you probably had mediocre returns. Even one year of vastly underperforming the market can have big consequences for your retirement.

In Fisher Investments UK’s view, most individual investors can benefit from maintaining a globally diversified portfolio with exposure to most sectors and various geographic regions. Global diversification can help reduce portfolio volatility whilst allowing you to take advantage of more investment opportunities. You can allocate more of your portfolio to areas you think will perform well and allocate less to sectors you think will lag, within reason. In the end, the main benefit of diversification is enhanced risk management.

Stay Disciplined to Your Strategy

Creating a long-term investment plan can help you stay the course when markets feel scary. Fisher Investments UK recognises investing is difficult and emotionally challenging. Why? Because humans are often swayed by emotions and tend to make investment decisions based on fear or greed, which can jeopardise any investment plan. Annual portfolio reviews can help you stay centred on your long-term plan and provide important insights about your progress towards retirement and other investment goals. We believe patience and discipline are two of the most important behaviours for successful investing, particularly during challenging market environments.

Interested in planning for your retirement? Get our ongoing insights, starting with a copy of 10 Retirement Investment Blunders to Avoid.

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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorised and regulated by the UK Financial Conduct Authority (FCA Number 191609) and is registered in England (Company Number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:SQ), Canary Wharf, London, E14 5AX, United Kingdom.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the US and regulated by the US Securities and Exchange Commission. Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.

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