Six steps to do an annual well being test in your investments

Shopping for new investments tends to be a much more appealing activity than carrying out a thorough overhaul of your old ones.

It’s all too tempting to skip straight to the former – enticed by dreams of the potential riches on offer – instead of taking a proper step-by-step approach to reviewing your investments.

In fact, getting diverted by new investing stories and buying into them on an ad hoc basis rather than sticking to your long term strategy is a classic trap you should try to avoid.

You should carry out a full health check on your investments at least once a year, ideally at exactly the same time to achieve continuity and build up a helpful performance record.

Early in the New Year, or just ahead of using your investing Isa allowance, or just after the end of tax year are all popular times, but pick a time that suits you.

Be aware that if you overdo it and check too often, you risk falling into another trap, which is being tempted into constantly making small changes and racking up extra costs.

If you have committed to being a long-term buy and hold investor, to save for retirement or some other goal, switching around all the time also doesn’t give ideas time to bloom.

‘It’s incredibly important to periodically review a portfolio,’ says Jason Hollands, managing director of Bestinvest. ‘Some do this on a quarterly or twice-yearly basis, but it should be done at least annually.’

‘That’s because people’s circumstances will change over time and portfolios will also drift as different assets and investments don’t all move neatly in tandem.

‘This can mean that over time, a moderate risk portfolio can quietly mutate into a high risk one.’

So what is the best way to review your portfolio? Follow our six-step guide.

1. Review your investing goals

Start off by thinking about why you began investing and whether your goals and timetable remain the same.

Then you should consider your current financial targets and the time horizons in which you hope to achieve them.

Once you know this, you can work out whether the growth rate of your investments matches your eventual needs – for example, you have £100,000 but want to turn it into £250,000 over a certain time period.

This will be very helpful when you come to assess the performance of your existing portfolio and whether it is up to scratch.

‘Most people invest for a reason such as retirement, paying off a mortgage or to help their children get through university,’ says Hollands.

‘Timelines to using their long-term savings will therefore naturally narrow and that often means that they should gradually reduce exposure to very volatile and risky investments, so they are not caught short.

‘However, other changes in personal situations might influence thinking, such as getting married, the birth of children or grandchildren, divorce or coming into a windfall.

‘Originally you may have invested solely for capital growth, but might now be a time when you want to start taking some income?’

Laith Khalaf, head of investment analysis at AJ Bell, says: ‘Probably the most important thing to assess when evaluating your portfolio is whether there have been any material changes in your personal situation.

‘Getting married, having a child, or buying a bigger house can have an impact on your finances, such as your life insurance requirements, and the need to update your will.

‘But life events might also affect how much risk you’re willing to take with your investment portfolio, for instance if you’re approaching your retirement and looking to start drawing on your pension.

‘So consider what, if anything, has changed personally, and how this might affect your attitude to risk.’

2. Assess the performance of your portfolio

Check the performance of your funds and any individual stocks since your last check, over a longer period like three or five years, and since you bought them.

Also check their performance against both the wider market and their peer group of funds or other stocks within their sector.

Consider whether they are meeting growth targets that will achieve the goals you decided on earlier. Then, you can work out which ones you might want to jettison and replace.

A portfolio can get stale if you allow it to drift, and you also need to ensure your investments are diversified to insulate them from the impact of different economic scenarios, advises Charles Stanley chief investment analyst Rob Morgan.

He suggest you review funds bearing the following in mind.

– Does it still meet with your objectives and fit well in your portfolio.

– Performance is important, but look behind the headline numbers and try to compare to its benchmark and sector, and ideally other funds that are aiming to do a similar thing. One year’s bad returns isn’t necessarily a worry but a consistent laggard fund is cause for concern.

– Are the charges still competitive versus what else is out there or can you get similar exposure cheaper. (Read more about charges below)

Hollands says: ‘Your chosen asset allocation will give you an important framework, which then needs to be populated in each area with sound investments.

‘I’ve found over the years that many DIY investors tend to get tempted into adding new funds each year and are less focused on casting the spotlight on the ones already held.

‘Some portfolios can resemble museums of funds that were popular in the past but have since fallen by the wayside. You may even find the odd dog fund lurking in the shadows.’

Hollands warns that people hang on to poor performers hoping they will one day bounce back, but that it is better to understand what you own and have a strong conviction that they are the right funds to hold.

‘It may be the case that a once strong performing fund has since experienced a change of manager, or it has got too big to be managed in the same way.’

Hollands suggest limiting the number of funds you hold – which in his own case is 20 – then when you see something new you like review your existing holdings in that area to see if it is really worth replacing them.

‘In choosing funds, investment trusts or ETFs, try to avoid become too heavily skewed to a single style, for example tech heavy growth funds or “value” funds that pick undervalued companies with high dividends,’ he adds.

Will Stevens, head of financial planning at Killik & Co, says: ‘Markets have had a turbulent 12 months with most areas seeing steep declines last year but some areas seeing strong performance this year.

‘It’s important however not to panic in a downturn as periods of poor performance are generally followed by periods of better than average performance.’

Stevens says you should look at whether your investments are performing in line with the wider market.

‘If they aren’t, it is best to speak to a financial adviser or conduct research so you can reconsider where your money is invested.’

3. Check that asset allocation hasn’t drifted

Asset allocation means the overall mix of investment you have between different types of investments, such as:

– shares

– corporate and government bonds

– cash

– commercial property

– more esoteric investments like private equity and hedge funds

– commodities like gold.

There is no single best way to split your investments – your decision will depend on your age and risk appetite, among other factors.

As most funds do not invest 100 per cent in a single asset class or region, you will have to check up how each is split. But there are online tools which help you work out the current allocation for your entire portfolio.

Portfolios tend to become overweight in areas which are doing well – sometimes becoming skewed by just one or two of your holdings providing most of the performance – and underweight in those doing poorly.

Since the latter are usually cheaper, correcting your asset allocation forces you to buy those as opposed to ones that have done well of late.

Khalaf says: ‘Market prices aren’t static and as a result neither is the shape of your portfolio. Over short periods this won’t make much difference, but given time the equilibrium in your portfolio can be lost.

‘Regular rebalancing is therefore an important discipline to keep your portfolio in good order.

When rebalancing, consider the regional and asset split of your portfolio, but also whether the fundamental reasons you bought an investment are still in place, adds Khalaf.

‘For funds and investment trusts, make sure there hasn’t been a change in fund manager or strategy, and if there has, consider whether it’s still fit for purpose.

‘For shares, consider if the reason you bought an investment has now run its course or has still got some legs.

‘Also consider if the business has undergone a material change in strategy or circumstances which make it a less attractive investment proposition.’

Morgan warns that you should also consider risk and whether one or a number of investments have grown to represent a significantly larger proportion of your portfolio.

‘It can therefore be prudent to bank profits in these and use the proceeds to top up in areas that have underperformed, thereby retaining the intended balance of your portfolio and helping smooth out returns.

‘If your circumstances or goals change, or you become more or less averse to risk, you might also need to review the suitability of your portfolio and consider altering the mix.’

Hollands says asset allocation is something professional investors focus heavily on but many DIY investors overlook it.

‘Sports fans would think a football team solely comprised of either defenders or strikers bizarre,’ he points out.

‘The key decision is how much exposure to have to equities, which are risky, but also to avoid being too narrowly focused on a single market or industry sector.

‘Equities will generate the highest long-term returns, but the their short term-volatility and risks can be tempered by including other assets like bonds, gold and infrastructure than will bring different qualities to the table, especially in tougher times.’

4. Research potential new investments

This is usually the fun part, as you dream of new opportunities. But don’t get carried away, and consider carefully whether the exciting new thing everyone is talking about is already a bubble that could easily burst.

Certain global trends are likely to endure such as population growth, the related need for more food and healthcare, and governments and businesses stepping up investment to avert a climate catastrophe.

But beyond pondering the big picture themes, look at individual funds and stocks in detail. Features to check include the following.

– Past data – as ever, bear in mind it is no guide to future performance.

– But use historical valuations to check how cheap or expensive an investment is compared with its track record over 10 years.

Many do this by using ‘CAPE’, the cyclically adjusted price-to-earnings ratio, also known as the ‘Shiller ratio’, which divides a price by average earnings over the past 10 years and adjusts for inflation.

– Economic issues affecting a potential investment.

– Track record of fund managers, including their whole career in case they have just been lucky recently, or company management if you are researching a stock.

– Dividend yield.

– The size of funds and how this has changed, because some small funds cannot maintain performance as they grow.

Professional investing experts explain how to research funds and how to research investment trusts.

5. Check if you can cut your investing costs

This is Money has a guide to picking the best and cheapest investing platform which is updated with the latest price changes as they emerge.

Even if you are not on the most cost-efficient investing platform, it might turn out to be expensive or simply not worth the hassle to switch to another one.

Generally speaking, keeping investing costs down can boost returns because you are shelling out less to middlemen.

But remember you are looking for value for money, not just something cheap as chips that then doesn’t deliver decent returns.

If you don’t want to pay active fund managers, who often do not justify their fees, tracker funds which simply clone a market will be much cheaper.

It’s still worth checking tracker charges when you carry out your review though, as providers often engage in price wars, so see if any can be got for a lower fee.

Will Stevens of Killik & Co says: ‘When conducting an annual investment health check you should be checking any fees associated with the investments you’ve picked.

‘If using funds, rather than a direct equity approach, these can erode your returns. It could be beneficial to adopt a more direct approach and diversify the portfolio directly.’

6. Don’t forget about tax changes

‘An important part of the jigsaw is to make sure your portfolio is invested as tax efficiently as possible,’ says Khalaf.

‘The sooner you put your investments inside the Isa or pension, the sooner tax protection kicks in.’

The capital gains tax allowance and the dividend allowance were cut to £3,000 and £500 respectively from April 2024.

Stevens says: ‘Reducing tax allowances and frozen thresholds have led to many portfolios attracting a greater level of tax.

‘As with fees, taxation can lead to a drop in net returns.

‘Utilising Isas and pensions, where appropriate, is an easy way to reduce tax drag on your performance and up total returns.’