Reflections - Reviewing Portfolios
In our portfolio assessment of client portfolios, one thing that stands out is that people always buy but never review their investments. Many a time, we meet customers who have done financial planning but do not review the performance of their plans regularly due to time constraints and lack of understanding. Even if you are a savvy investor and have a buy and hold strategy, it does not mean you be oblivious to portfolio reviews.
It is important that your implemented financial plan is reviewed on a regular basis to confirm that it continues to meet your financial goals.
Womantra shares with you how to prepare for a review, what to review and with who to review.
Preparing for a Review:
The following factors will help aid you in reviewing your portfolio more efficiently, keep in mind the following :
Time- Decide on the amount of time you are willing to spend on your review. Ideally it should be done quarterly and at the end of the financial year. Pick a date for the quarter beginning and stick to that date.
Experience- How experienced are you as an investor? If you are a less experienced investor, your review may not be thorough, but still a big improvement over not opening your statements. Include your advisor in your review of the portfolio. An advisors not only recommends the product but has to review that what he has recommended matches your goals on an ongoing basis.
Size of portfolio- No matter how large or small your portfolio, it is all you have, so it is important to you. Don’t avoid reviewing thinking you don’t have enough.
Risk- Risk is always a consideration for your overall portfolio and for each and every holding. Every investment must be assessed from the point of view of liquidity (can I get my money out?), potential for success (expected results are realized), potential for failure (how much can I lose?), and how it fits with the other investments in the portfolio.
Complexity- The level of complexity of your overall financial picture will determine the information you will need to consider in your review. You could have multiple goals, including a shorter-term more conservative goal (college tuition for your kids) and a longer-term more aggressive goal (your broker lends you money) or a unit linked insurance plan where charges /returns etc need to be understood in more detail.
Economic Environment- Be aware of the economic changes in environment and how that will affect your investments. Change in tax laws, new products, increase in limits of investments etc.
What should you Review:
It is good idea to have a quarterly review and a financial year end review. Quarterly review should include a check on your
1) Asset allocation
2) The performance of each investment versus a benchmark
3) Projection of cash flows for the next quarter.
4) It is essential not look at only absolute returns of an investment but the performance relative to a benchmark. The benchmark for an investment has to be carefully chosen. For eg if you are investing in a midcap fund, you have to choose a midcap index and not Nifty.
5) Revisit goals every quarter
6) Upcoming maturities of FD /FMP /Policies
The Year end financial review should include:
1) Overall portfolio returns
2) Capital gains
3) How much of your financial goals have been met by your investments.
4) You should also calculate your assets and liabilities.
5) For those who have taken home loans, it is a good idea to know the principal outstanding on the loan.
6) You must also check on underperforming investments - do not go blindly by returns, check for reasons for underperformance and see if you want to exit that investment and reinvest. Here again performance relative to a benchmark will be an important parameter. However, do remember that portfolio rebalancing has costs and tax implications. Keep these factors in mind while rebalancing.
7) In case you have had an addition to the family, you must redo your financial plan to include the needs of the new member.
8) If you have had a salary raise, the additional income needs to be taken into account and a portfolio review will be required.
Alone or with an adviser? It is important to set the expectation right in the beginning. Apart from recommending products it is a key role of an advisor to help you review your portfolio. It is important for you to inform him the date on which you would like the review and the data you expect from the advisor. On the other hand it is an important part of the advisors role to review the returns v/s benchmark performance, investments growth against goals, update you on the latest changes in the economic environment and how it affects your portfolio.
Its not enough to plan, you have to ensure that investments are growing as per plan.
Mrin Agarwal & Rima H
Founders and Trainers Womantra