HOW TO REVIEW YOUR PORTFOLIO
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Fund Library Q&A
Your questions about financial planning, investments, and portfolio management answered by an industry expert



By Robyn K. Thompson  | Friday, January 05, 2018




Q – I know it’s important to look at your portfolio performance every year to see if you’ve come out ahead. But I’ve also read that conducting a portfolio review is also important. However, I’m not sure why. I thought the bottom line performance would tell you all you need to know. Can you enlighten me? – Philip K., Kingston, Ontario

A – Looking at your annual bottom-line performance is, of course, key. But it doesn’t tell the whole story. Conducting an annual investment review over and above the pure performance number tells you not only how your portfolio has performed – and whether it has outperformed your benchmark – but whether it’s time to make changes to your holdings. For example, some of your investments might have performed exceptionally well over the past year – U.S. equities, for example – and may have distorted your equity asset weighting well beyond your target level as a result. To properly review your portfolio, look first at four key areas.

1. Asset allocation

Assets are generally divided into safety, income, and growth categories. The respective weightings in your portfolio largely account for the return you can expect and the overall risk of your portfolio. If your original allocation target is distorted by extraordinary gains or losses in one class or another over the year, your risk profile will change. For example, if equity has outperformed, the value of your stock holdings will have increased with the result that equities may now be overweighted in your portfolio, making your portfolio riskier (more volatile) than you might have wanted it to be. So it’s important to review your asset weightings annually to make sure you aren’t taking on more risk than you’re comfortable with.

2. Asset diversification

Diversification is at the heart risk mitigation. It doesn’t make a lot of sense to hold only one bond in your fixed-income class and only one stock in equity. Review your portfolio annually to ensure investment in each asset class is spread out over individual securities, categories, and geographic regions. In fixed income, for example, you’d spread weightings among federal, provincial, and corporate bonds. And in equities, you’d diversify by sector, by region, by capitalization, by dividend yield, and so on to achieve your desired risk level.

3. Individual securities

When researched, analyzed, and selected properly, individual stocks and bonds within a portfolio work in harmony to achieve a specific goal, say a minimum dividend yield or a specific target price gain or a specified yield to maturity. When that target has been achieved, the position is usually analyzed to determine whether a switch or change within the portfolio is needed. Sometimes this is done at year-end in conjunction with generating tax losses to cover capital gains.

4. Mutual funds and ETFs

If you’ve invested in mutual funds (for active management) or exchange-traded funds (to take advantage of diversified low-cost passive holdings), review your funds’ performance over the past year and compare it with your investment rationale. Have there been changes in fund management or mandate (in the case of mutual funds) or to index methodology, liquidity, or ownership (in the case of ETFs)? Investment funds are frequently closed, merged, and renamed. Make sure such funds still deliver what you expect. If not, consider appropriate alternatives.

Tax consequences

Making changes to your portfolio allocations through asset sales may have unintended tax consequences or other unwanted effects. And remember, your objective is not to remake your portfolio but to restore it to a state where it continues to meet your time horizon, risk tolerance, and return objectives. If your portfolio has outgrown your ability or desire to manage it, consider consulting a qualified independent financial planner to help you work through the review process. – Robyn

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

© 2018 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.

   
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