Now is the time for an investment health check


What will your financial priorities be during 2021? After a tough 12 months in 2020, now is the time to start planning for the 12 months ahead – make it a new year’s resolution to think afresh about your financial goals and whether you are on target to achieve them.

Start from the premise that financial planning is a long-term pursuit, as you seek to arrange your savings and investments in order to realise different goals over time. But that does not mean you can simply forget about your portfolio once you’ve set it up – your objectives may change and, in any case, you need to make sure that your holdings are delivering what you hoped for.

A regular makeover

A thorough annual review of your investments makes sense. Review it more often than that and there is a danger that you’ll end up constantly tinkering, lose sight of the long term and incur expensive transaction charges. Review it less frequently and you may not spot problems until they have done real damage to your finances.

Start by reassessing your goals. Are you still hoping to achieve the same objectives as you had in mind when first thinking about your portfolio and the asset allocation you set accordingly? If so, is that asset allocation still appropriate?

There are a number of issues to review. Look at the performance of the individual holdings within your portfolio, with a view to identifying any duds that may need to be replaced. Examine whether the asset allocation in your portfolio has changed significantly given that each of the asset classes to which you have exposure will have achieved different returns – if so, you may need a rebalancing exercise to get back towards the model you originally designed.

Investors should also be thinking about whether their attitude to risk has changed – if, for example, you are getting close to achieving your goals, you may wish to move away from volatile assets that could jeopardise the progress already made. A move out of equities into fixed income assets is a common step for people coming up to retirement, for example.

New priorities?

It is also possible that your financial objectives have changed since the last time you reviewed your portfolio. Anything may have happened in the meantime, from major life events such as having a child or losing your job, to new ambitions coming along – the desire to go back to college, for example, or retire early. Given the tumultuous year we have just lived through, there is every chance that your outlook has now changed.

If that is so, there’s a good chance the asset allocation you previously set will not be the right one to give you the best chance of realising your new ambitions. In which case, you may need to go back to the drawing board.

The asset allocation you need now will depend on the exact nature of your new objectives. How much do you need to save to achieve them and by when? Are you able to take a sufficiently long-term view to countenance the possibility of volatility in the short-term that could see your savings dip in value? Or do you now need greater security?

The answers to these questions – and many more – will determine how much of your portfolio you can allocate to more risky asset classes such as equities and how much you should hold in lower-risk assets such as bonds and cash. And don’t overlook other asset classes, which may provide important diversification benefits – investment companies, for example, offer an easy route into areas including private equity, hedge fund, infrastructure and venture capital.

Finally, it is possible that once you have reviewed your portfolio, you decide no changes are needed at all – that you are on track to achieve your objectives, that all your holdings are performing well and that your current asset allocation is the appropriate one to carrying on making progress. That is fine too – do not be tempted to make changes just for the sake of it.