Make sure you get the best out of your portfolio

18 January 2008

It's only when something goes wrong that you realise it hadn't been running as smoothly as you thought it was. That's why you have an MOT on your car once a year and why the dreaded visit to the dentist cannot, unfortunately, be put off forever. The same applies to your investments - if you don't keep regular tabs on them, you could see years of savings go up in smoke.

Too few investors subject their investment portfolio to a regular MOT. But if you set aside an hour or two every six or 12 months to look at how your investments are doing, to ensure nothing's going off the rails and costing you money without you realising it, you could be doing yourself a massive favour.

If you have a high-risk investment portfolio, you should give it a close inspection at least every quarter.

Similarly, if you're approaching retirement, says Donna Bradshaw, financial strategist at IFG Financial Services, it's increasingly important to keep an eye on your portfolio. "When you're 10 years away from retirement you definitely need to start looking at your investments more closely," she explains. "You need to consolidate your gains and manage your expectations more, as the move to more cautious territory means you could lose out on future market rises."

You don't need to go crazy and change everything each time you examine your investment, though. Reviewing your investments is about more than just checking performance. There's no way of knowing if your investments are really meeting your needs unless you take stock and reconsider your objectives.

Understand your goals

What you want from your investments can change over time, especially if they've been in cobwebs for a few years. Your objectives can depend on several factors - your age and your circumstances being the most obvious.

Age also dictates your attitude to risk, to a certain extent; younger investors have time to ride out short-term volatility, while those who are about to retire don't. Understanding your attitude to risk is vital, but it's not always that simple.

A good way to judge your risk attitude is to ask how much money you could cope with losing in exchange for the level of growth you want. Would you rather a 90% chance of making £1,000 or a 50% chance of making £10,000?

Keeping this in mind, write down how much money you already have invested. Then, ask what your reasons for investing are. Is it just to make your money go further than it had in a deposit account? Or do you have a specific medium or long-term goal in mind? It could be saving for a house purchase or wedding, building up a retirement pot or nest egg for the kids, or generating a steady supply of income. Once you've got a firm understanding of your goals, you can take a closer look at your portfolio.

Asset allocation

If your money is in several different kinds of investment, the first thing you need to do is check the balance is right. There are, very roughly, three types of investor - risk-averse, medium-risk and adventurous. If you're generally risk-averse and perhaps not too far from retirement, the very most you should have invested in equities is 40% - if it's more than this, reduce your exposure.

On the other hand, if you've got the time to ride out any short-term stockmarket volatility - say, 10 years or more - you should probably have around 70% in equities (assuming you've got money on deposit too).

To reduce the risk in your portfolio - regardless of your risk appetite - it needs to be well diversified. This is even more important than the individual fund choices you make. For most investors, equities, bonds (corporate or government), property and cash are the four portfolio pillars, as their fortunes are driven by different factors. So once again, when rebalancing your portfolio you need to think about your personal circumstances.

Make a list of all your investments, under asset categories. This should help give you an idea of whether you need to rebalance your portfolio. If you're 60 and looking to protect your income but find more than half of your portfolio is in equities, for example, you need to make adjustments.

At the opposite end of the scale, if everything is in bonds and cash and you're 30 years away from retiring, it's worth considering taking the added risk of investing in equities. Over the long-term, stockmarket investments outperform the other main asset classes and the risk is reduced the longer you stay invested. Now, you are ready to take a closer look at the individual investments you hold.

Checking performance

One mistake commonly made by investors is remaining in funds that just aren't doing their job. This is usually because once the money is invested, it's left alone too long, so even if you're not losing money, you might not be making as much as you could.

According to, which monitors individual fund performance, thousands of investors fall into the trap of keeping their money invested with big name fund groups that fail to live up to their reputation. "Investors are constantly being short-changed by many of the funds promoted by the largest fund management houses. These groups spend heavily on marketing but then consistently struggle to deliver the goods," says moneyspider spokesman, Tony Ahearne.

A recent Spot the Dog study from Bestinvest, which identifies funds that have underperformed their benchmark in each of the last three years and by at least 10% over the period as a whole, underlines this. It found that 72 funds, in which a total £12.6 billion is invested, meet this definition, with household names such as AXA, HSBC, Fidelity and Henderson among the guilty parties.

The most obvious thing to do is look at the most recent performance, although (as it says in the adverts) this is no guarantee of future performance.

If possible, avoid focusing on funds with the most eye-catching performance over the short-term, as these can be the most volatile - two-thirds of funds that outperform one year fail to do so again the next. It's often tempting to put your money in the latest investment craze, but this is rarely a good idea. Donna Bradshaw advises: "Don't follow the herd. If you want a small exposure to something that's caught your eye, it's OK only if you've got a good-sized portfolio."

Performance isn't the only thing to look at, Bradshaw adds. "Look at the manager - if a manager has moved, has that affected the fund? - and at how the fund is managed. Active managed funds should outperform passive ones, which hug their index over the longer term."

Another factor is charges. In most funds, the fund manager gets 1.5% of the value of your investment a year, which over time makes a big difference. If this has increased, ensure that the quality of the fund justifies the extra costs.

There are often charges for switching funds, however - you could pay a full initial charge again, usually around 5%. But this might not apply if you move to a fund managed by the same company. This is where using a discount broker or a fund supermarket can come in handy as they often have discount deals with fund companies that they pass on to investors. However, these do require you to know what you're doing - if you aren't sure, it's better to speak to an IFA.

Whether you use an IFA or do it under your own steam, however, there can be no doubting the importance of looking under the bonnet of your portfolio regularly to ensure your investments are not going to veer off course anytime soon.

Shopping for funds

If you find you haven't got time to look after your own investments, independent financial advice is itself a useful investment. But if advice isn't what you want, there's another efficient way of managing your investments.

Fund supermarkets - such as - allow you to hold all your investments on one platform and have constant access to your portfolio valuation and performance. It is easy to actively monitor the performance of your holdings and to switch if appropriate.

"It's also easy to view your portfolio against a backdrop of other investments," explains Rebecca O'Keeffe, head of fund management at Interactive Investor. "You may well have chosen the best fund in a particular sector, but you may be interested in seeing how that sector is performing against others and the market as a whole."

Maintaining a healthy interest in your fund choices will also allow you to confirm that the reasons you had for choosing your investments in the first place are still relevant. Fund supermarkets allow you to access fact sheets, which will tell you if the fund manager has changed and will also allow you to monitor performance over a variety of time periods.

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