It may come as something of a surprise to discover that we're already halfway through 2011. Not a lot has changed in the first six months of the year: interest rates remain at historic lows with little sign of an imminent hike; Greece and eurozone sovereign debt continue to dominate the headlines; the range-bound FTSE tests 6,000 every now and then but fails to hold on. But despite the malaise in the stock market, your portfolio may well have undergone several shifts in this time period, which is why now is a good time to conduct a mid-year portfolio review.
A bi-annual check-up might sound too infrequent to some. But if you're paying attention to the news flow and checking in on your portfolio holdings every day--or worse yet, throughout the day--you may be tempted to trade more than needed. In turn, you may run up high tax and transaction costs, and you're also more likely to chase whatever's been hot recently in the hope that it will continue to outperform. What a terrible way to invest.
A better, and certainly lower-stress, way to operate is to put in place a disciplined process for checking up on your investments--ideally just once or twice a year or every quarter at most. The lynchpin of such a hands-off portfolio-management programme is a well-articulated investment policy statement that spells out how often you'll check up on your holdings and what you'll be looking for when you do. (Find out more about creating your IPS and download our IPS worksheet here.)
If you don't have an investment policy statement but want to conduct an efficient and effective portfolio review, you'll want to concentrate on four key elements: your asset allocation versus your targets, fundamentals (whether there have been any notable operational changes at your holdings), performance, and taxes.
Observe the following five steps as you conduct a review of your portfolio. Take notes as you go along because you'll want to refer to them as you decide whether to take action.
1. Check Up On Your Asset Mix
One of the most important determinants of whether your portfolio is positioned to meet your goals is your asset allocation--how much you hold in stocks, bonds, and cash. Premium users can get a precise read on how their portfolio is currently positioned, by checking out Morningstar's Instant X-Ray tool. In our Portfolio Manager tool, free to all users of Morningstar.co.uk, enter a ticker for each of your holdings (don't forget company shares and cash), along with the pound value for that holding, then click Show Instant X-Ray. You'll see a range of tables and charts depicting how much you have in each of the major asset classes, which you can then compare with your target allocations.
But what if you don't know how much you should have in stocks (domestic and foreign), bonds, and cash? If that's the case, check out this previous article on finding the right stock/bond mix for you.
Once you've assessed your portfolio's asset allocation, turn your attention to how your stock and bond holdings are positioned. Within Instant X-Ray, you can see stock and bond Morningstar Style Boxes (two nine-square grids in the upper right-hand corner of the X-Ray page) that depict the investment styles of your holdings. Although you shouldn't expect to see an even distribution of holdings in each of the nine squares, you do want to take note if the majority of your holdings are huddled in only one or two regions of the style box.
Instant X-Ray also shows you how your stock holdings are dispersed across various market sectors as well as how that positioning compares with your chosen benchmark. As with style-box positioning, you shouldn't get too worked up about some divergences, but you do want to take note of very big bets--sectors where your weighting is more than twice that of the index, for example.
Finally, pay special attention to whether your portfolio is disproportionately skewed towards one or two individual share holdings, for example, if your employer pays you partly in company stock you could find that this is hogging a share of your portfolio. (As a general rule of thumb, company stock should take up less than 10% of your total holdings.)
2. Review the Fundamentals
Once you've checked out your aggregate portfolio's positioning, it's time to conduct a quick check-up on each of your individual holdings. Near the bottom of the Instant X-Ray page, you'll see links for each of your funds or stocks; click on the links to see a detailed report for each.
Morningstar's Analyst Reports--on Equities, Funds and ETFs (available to Premium users)--are a quick and easy way to get a handle on the key issues at most prominent funds and publicly traded companies. Our analysts will also tell you whether they think a security is worth owning.
If you'd like to conduct your own research on your holdings, you'll need to drill down into the data. For funds, take note of any manager changes, strategy alterations, or upheaval at the fund-company level. (A lot of fund shops have changed hands during the past few years.) As you assess individual stocks, take note of price multiples and profitability trends.
3. Examine Performance
It's a big mistake to focus too much attention on short-term performance, but your quarterly or bi-annual portfolio review should include a quick assessment of which of your holdings are providing the biggest boost to or drag on your portfolio's overall return. It's fine to glance at year-to-date performance, but focus most of your attention on the longer-term numbers--each holding's return during the past three and five years relative to that of other offerings within that same category. Premium users can easily find alternatives by using our Find Similar tool, which enables you to view the five closest investment products to the one you enter.
Also take note of absolute returns. Which of your holdings have contributed the most or detracted the most from your portfolio's bottom line? Sustained underperformance can be an indication that something's seriously amiss with one of your holdings. But assuming that your rationale for buying a stock or fund is still intact, a spate of weak returns can also provide you the opportunity to add to that holding on the cheap when you rebalance.
4. Scout Around for Tax-Loss Candidates
Given the market's recent drop, there's a good chance that you have holdings that are currently trading well below your purchase price. If you hold these stocks or funds in your taxable account, you might consider cutting loose your fallen holdings and booking a tax loss; you can then swap into a similar security or consider buying the same security in a tax-efficient account such as an ISA. Visit our ISA Centre for more on ISA investing.
5. Plan Your Next Move
After you've reviewed your portfolio's current status, it's time to plan your next move. It's not likely that you'll uncover a portfolio problem you need to address right away, but you should make sure to schedule a time to rebalance your portfolio. Conventional financial-planning wisdom holds that the best time to rebalance is at year-end, with an eye towards harvesting any losses to offset capital gains elsewhere in your portfolio. But if you'll have more time to focus at some other time of the year--say, earlier in the fourth quarter--by all means do so.
