As we are close to the end of the year 2021, there are several tasks you are planning to complete before the new year, and reviewing your investment portfolio should be one of them. With all the changes that you and your investment portfolio might have experienced over the prevailing year, it’s important to take some time to evaluate your holdings this year.

As an investor your risk profile, financial conditions, investment objectives, and the overall market conditions may undergo changes over a period. This makes it prudent to review your investment portfolio to ensure that you are well on track to achieve your envisioned financial goals.

Given that the year 2021 is coming to an end, an annual portfolio review of your holdings would be beneficial for you, especially now when there are certain headwinds in the play. The recent threat posed by the spread of the ‘Omicron’ variant of coronavirus, which has become the dominant strain in South Africa, is spreading like wildfire across numerous countries.

The global economic recovery has been again threatened due to the virus’s rapid spread, leading to weakness in several markets around the globe. If restrictions and localised lockdowns are once again imposed by the government to curb the spread of infections, it could potentially pull down economic growth and corporate earnings. Experts say that the Omicron variant may affect both global and domestic market momentum if it is severe than the previous delta variant.

Rising inflation globally will create a path for rate hikes sooner than anticipated, which may intensify volatility in the market. The U.S. Federal Reserve has already indicated that it will finish its bond-buying program by March 2022 and thereafter increase interest rates to cope with surging inflation. The hike in interest rates in the U.S. could lead to global funds pulling out money from domestic markets.

Moreover, the RBI is likely to follow suit on rate hikes. This is likely to increase the cost of capital for corporate and impact their earnings growth. Consequently , the equity market is expected to remain volatile in the near term.

Thus, to mitigate the impact of market volatility on your investment portfolio you must consider an annual portfolio review. Such portfolio review is a way to check up on your portfolio and potentially make some changes as required for healthier portfolio performance. After all, even if you haven’t actively made any changes to your portfolio mix over the year, the contents of your portfolio may have shifted.

Investment portfolio review helps you know your investments better; it makes it easy to make informed decisions aligned to your investment strategy so that you do not deviate from your financial goals.

Here are a few simple steps you can follow, begin with your year-end investment portfolio review:

1. Ensure that your portfolio aligns with your goal

The purpose of a portfolio review is to ensure that your investments are still aligned with your goals, investment horizon, financial situation, and risk tolerance over the year. If they are, it’s a good sign, andif not, it’s time to make required adjustments. You must start with a plan that includes ensuring your envisioned financial goals are on track.

Due to various circumstances, such as the uncertainties amid the pandemic, you might encounter some changes in your financial profile as well as your goals. Thus, to ensure that your investment portfolio remains in accordance with your financial goals , the primary step is to start reviewing them periodically.

2. Review the performance of your portfolio

After you have ensured your investments are aligned with your financial goals, you need to analyse your portfolio performance. Your portfolio’s performance depends on the types of assets/schemes that you hold and the performance of those particular asset classes or schemes. However, at times your portfolio could be performing poorly even though the underlying asset class is doing well. Hence, you need to identify any holdings that are underperforming and replace it with a better alternative if necessary.

Note that if your portfolio is underperforming when market sentiment turns sour, you should not panic and make changes. You must analyse the various quantitative and qualitative parameters of your holdings to uncover any consistent underperformers; short-term underperformance caused due to market turbulence can be ignored.

A thorough review of your portfolio performance will help you understand the investment decisions you need to make. This step will assist you to prevent holding unworthy and unsuitable investments that create a hurdle in achieving your goals. You need to ensure to cull out consistently underperforming investment avenues, identify any red flag investments and maintain a healthy portfolio to generate optimal returns.

3. Evaluate your Asset Allocation

Your annual portfolio review is a great time to reconsider your asset mix of investments in various asset classes. You must ensure that the asset allocation you have set matches your risk tolerance, financial situation, and time horizon. If you have experienced major life changes, you may also want to adjust your investment strategy and target asset mix.

Suppose you haven’t reviewed your portfolio for a while. In that case, there is a possibility that the relative market performance of asset classes has changed your investment mix, causing your combination of equity and debt investments to drift away from your asset allocation strategy.

As no two-asset classes perform in the same direction, the ideal asset allocation for investors is a combination of equity, debt, and other asset classes. Asset allocation is the cornerstone of investing, and diversification is the key to holding a robust portfolio that can thrive in various market cycles.

Considering the market dynamics and your financial circumstances, you may reallocate your investments if the current asset mix is not up to the mark into the desired asset classes to establish a better risk-reward ratio. Consider constructing an ‘All-weather’ portfolio that will ensure your investments are well diversified within asset classes to survive the tides of market volatility.

4. Avoid taking undue risk

Another important step while reviewing your portfolio is to make sure you are not taking any undue risk. It is important to balance your risk-return ratio, identify the risk exposure in your portfolio; with the higher risk,you may experience larger losses in a market downturn than you are comfortable with. Hence, you must avoid taking any undue risk by investing in suitable avenues that align with your risk profile.

The current holdings might be ideal as per your earlier asset allocation; however, considering the changes in market dynamics and uncertainties due to pandemic, your risk profile might have changed. For instance, your portfolio has high exposure to equities, which are high-risk high-return propositions, but your risk tolerance level has dropped to moderate or conservative, you will need to rebalance your portfolio and move to safer avenues like debt to avoid attracting undue risk. The investment portfolio must be in sync with your risk profile to maintain a healthy portfolio performance.

5. Aim to improve your Return Potential

A periodic portfolio review is not just to evaluate your existing portfolio, eliminate the underperformers, change asset mix, but also improve your return potential by investing in new worthy avenues.

Once you have identified the holdings that aren’t performing well for long or have been exposing you to an undue risk profile, replace them with mutual fund schemes that could improve the overall return potential of the portfolio. This encompasses new investments that can help you achieve efficient risk-adjusted returns and accomplish your financial objectives and goals.

6. Rebalance your Portfolio

Reviewing and Rebalancing are two different aspects. Portfolio rebalancing is nothing but correcting the deviations in the original allocation. For example, you initially you invested 60% of your equity portfolio in large caps and the balance in mid-caps and small-caps. Now, after a sharp run up in values of mid cap and small cap stocks it is likely that overall allocation of large caps in your portfolio has reduced, say to 50%. So as a part of portfolio rebalancing you need to cut exposure to mid-caps and small-caps and simultaneoudly increase exposure to large caps to achieve the inital equity mix.

You may only consider to rebalance your portfolio when there is a significant deviation from the original mix and not every time you plan to review your portfolio. This step of rebalancing your portfolio will enhance your portfolio performance and also reduce the risk of concentration to any particular category or sub-category of assets. As you review your investment portfolio periodically, you will understand that when your portfolio needs rebalancing exercise to enhance its performance.

To conclude

It is essential to review your portfolio periodically in suitable intervals, at least semi-annually or annually. No matter how cautiously you choose your investments, there is no assurance of future performance, as changes in market outlook influence your portfolio performance.

Portfolio review not only addresses the shortcoming of a portfolio but it makes newer provisions as per your requirements. It helps ensure suitable asset allocation to make your portfolio well-diversified and avoid any undue risks. Reviewing your portfolio periodically lets you know how many shortfalls will be there if you continue the same investments. With this, you can make timely informed investment decisions.

Keep in mind that reviewing your portfolio periodically, such as the year-end review, will assist you in creating an all-weather portfolio. Remember that the investment decisions to Buy, Hold and Sell the investment instruments in the portfolio should be rational, scientific, and unbiased with thorough research and analysis.

This article first appeared on PersonalFN here

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