Get the balance right
Faith Glasgow weighs up how and when to review your portfolio
There’s nothing quite like a market wobble to prod long-term investors into engaging with their fund portfolio to see what damage has been done.
And if you find, as many investors no doubt did in the face of the recent correction across global markets, that your holdings seem to have taken quite a battering, then it may well be time to review the whole thing more closely.
August’s losses can be traced back to a number of factors, but a key one was concern around potential recession in the US. Major tech stocks in particular took a significant hit, compounded by fears that their earnings will not continue at current levels.
Those broad market losses were largely recouped through the latter part of the month, with the S&P 500 index roughly back to its previous level; but the tech-heavy Nasdaq has not fully recovered. So if you hold a tech-heavy portfolio, chances are you’re still feeling some pain – and maybe wondering whether life might be more comfortable with a more balanced approach.
“The recent wobble is actually a really useful event, because it will have shown which investments within a portfolio are most volatile in a sell-off…”
As James Hughes, investment director at Quilter Cheviot, observes, these shakedowns can be a valuable call to arms for investors. “The recent wobble is actually a really useful event, because it will have shown which investments within a portfolio are most volatile in a sell-off,” he says.
“It’s important to think about how the correction made you feel and whether a more pronounced correction would result in some poor decision-making – in other words, is the portfolio carrying too much risk, so that you’d be forced to sell assets when values were down in order to protect yourself in such a situation?”
Of course, a well-constructed portfolio should already reflect your tolerance for risk, so that you don’t have to take such drastic steps. But if yours has fallen more than you expected or are comfortable with, then it’s probably time for a thorough review.
At the same time, remember that long-term investment success involves the capacity to ride out shorter-term turbulence. “Providing fundamentals haven’t changed significantly, a market wobble alone is not a reason to make significant changes to your portfolio,” argues Gavin Haynes, investment consultant at Fairview Investing.
“Providing fundamentals haven’t changed significantly, a market wobble alone is not a reason to make significant changes to your portfolio.”
Indeed, says Jason Hollands, managing director of Bestinvest, it’s not a great idea to do an overhaul during periods of volatility. “When markets go through bouts of turbulence, weightings to different assets can swing violently day to day – so if you are making changes there is a real risk that you trim a position at a low point, only to purchase a new one on the back of a rebound.”
The key is to carry out regular reviews – Haynes suggests a six-monthly review for fund portfolios, though some professionals review on a quarterly basis. This should ensure your portfolio is neat, well-balanced and tuned to your needs and attitude to risk – minimising the risk of sleepless nights when markets are on the skids.
The aim is both to make sure the asset allocation and risk profile doesn’t gradually drift away from your original objectives, and to ensure holdings whose prospects have soured since purchase can be identified and monitored or replaced.
What factors should you bear in mind when you review your portfolio?
As we’ve already seen, risk - the extent to which you want to be exposed to the stock market, where the greatest volatility generally lies – is critical.
Consider also your circumstances. If you have a decent salary and decades until retirement, you can afford to focus more on equities and on growth investments where profits are reinvested rather than paid out to shareholders. As you move into retirement, you’ll probably want to reduce risk and adjust the portfolio at reviews in order to generate a sustainable level of income.
In that context, whether you’re reliant on income from payouts or from capital, it’s important to ensure that you can continue to draw it even if markets sell off. “Essentially, you need to think about the balance of income sources and make sure you have enough bond exposure or more defensive equity income,” says Hughes.
Think also about regional and sectoral allocation, which for a fund portfolio really involves drilling down to the allocation of underlying holdings. For example, as we’ve noted, many investors recently may have found they have a tech bias that they didn’t even know about.
“On paper it might look like you have good diversification within a portfolio through regional and global equity funds – but it’s often the case that there will be a high degree of commonality within holdings. The S&P 500 now has over a third of its value in seven stocks, the so-called Magnificent 7,” Hughes explains.
“If on top of a US tracker you have additional tech exposure and some global equity exposure, it could be the case that you have a very high exposure to just a handful of names.” Consider looking for some alternatives that diverge more widely from the benchmark, if so.
“Too much tinkering can prove costly without necessarily adding value.”
Your review is also an opportunity to take some profits from the most successful areas and reinvest into cheaper, ‘up and coming’ parts of the market, says Haynes. However, remember that buying and selling adds transaction costs. “Too much tinkering can prove costly without necessarily adding value,” he points out.
Finally, investment trust investors may be able to play the discount/premium game. Trust premiums and discount levels relative to history may help you identify ‘toppy’ shares and bargains at review: a trust moving onto a premium could flag an opportunity to take profits, while a relatively wide discount might indicate a contrarian buying window.
“Remember, investment trust portfolios are assembled with long-term performance in mind, so some short-term volatility should be expected.”
However, try not to chop and change your portfolio too much just because some funds may be going through a bad patch. Remember, investment trust portfolios are assembled with long-term performance in mind, so some short-term volatility should be expected. Selling when a fund is performing badly and buying one that is performing well (selling low and buying high) is one of the most common mistakes that private investors make. Sometimes, the best thing to do is nothing at all.
Ultimately, the aim of regular reviews is to ensure that you understand and are happy with your investment line-up. That should make it much easier to take short-term market turbulence in your stride.
