When you have assessed both your portfolio as a whole and its constituent parts you absolutely must apply context. Simply put, this means asking WHY. Why has your portfolio under- or outperformed? Why has a particular fund done better or worse than its sector average?
Apply Context
If for some reason you were living under a rock for the past year, and weren’t aware that there had been a pandemic, then you might have looked at your portfolio last March and thought something was amiss. “Gah! I’m 20% down – disaster!”
But if markets were 40% down, then it’s clear that your well-diversified portfolio did its job in protecting you from the worst of the downside, and as it happens has caught the bounce back up very nicely.
If you’re invested in passive funds, you should be looking at how closely your funds have tracked their markets and asking why there was any divergence, or why your fund seemed to track less accurately than some of its peers.
If you’re invested in active funds – ask what decisions your manager made to make the fund perform as it has. Always ask why – there’s a reason for everything, and knowing that reason for the performance of your portfolio and its constituents is necessary for a thorough review.
By the way, if this is sounding like a lot of work, that’s the benefit of the passive, multi-asset approach I preach – most of this is done for you, allowing you to get on with your life! Lazy investors, rejoice!
Make Changes if Needed
When should you consider making changes? The first thing to say is that you should avoid tinkering. Make changes sparingly and only after careful consideration. Knee-jerk reactions are bad investing behaviour.
At a portfolio level, consider making changes if your overall performance is below your planned benchmark over the medium term, that is, over five years or more. Also, if the volatility is outside your comfort zone, this might also be a reason to make some changes.
At an individual component level, you might consider making switching funds if performance is below sector average on a three- and five-year timescale. Also, if volatility is above average and Sharpe is below average, these might be triggers for a change.
For active funds, if the Alpha is consistently below average, I’d be looking at alternatives too. Give yourself the time to make decisions. Place a fund on a watch list for three months or even a year and keep an eye on it. Don’t make changes with a short-term vision and only make them with careful thought – be intentional in it all.
Reassess Your Timescales
When reviewing your investments, you need to check in with your timescales. After all, if it’s a year since your last review, then you’re a year closer to the goals you’re working towards.
If you’re seven years into a ten-year saving/investing goal, you might want to consider changing the investment risk to reduce the chances of any market shocks messing things up at the last minute. This is only the case if you’re planning a cash event, that is, selling investments to realise cash so you can spend it or give it away.
