I'm often asked by national press journalists for some advice for their readers on how to review their investments and pensions. For example, what is the best way to determine the level of risk in your portfolio and how much you should be taking? How do you know if your portfolio is in line with your investment objectives or whether the funds are any good? You might just want a second opinion on the portfolio your financial adviser has recommended you invest in. In this article I will show you how to quickly review your portfolio, using some exciting tools, and it won't cost you a penny. Neither will you have to pay to see a financial adviser.
What you will gain from this review
If you follow my advice in this article then by the end of it you will:
- have assessed your existing portfolio's suitability in terms of risk and asset allocation
- received an independent assessment of the funds you invest in
- scientifically find out your true attitude to risk
- find out your ideal asset allocation
- have a shortlist of the funds you should be invested in
How to review investment & pension portfolios
Step 1 - Checking your portfolio risk and fund ratings
Normally it is incredibly difficult to work out the level of risk being taken within a portfolio as each fund can contain hundreds of assets, each with their own risk profiles. However, I recommend that you use my favourite portfolio assessment tool*. Below I walk you through the steps of how I use it to review a portfolio. First of all download the tool's guide via the link above and you will be given access to the tool.
Once you've downloaded the guide you will find the url of the tool (which is called 'First') within it. Load up the tool and it will then ask you to put in your current portfolio and the amounts in each fund. The tool then gives you a full breakdown of:
- your portfolio's current risk profile
- your asset allocation (i.e your exposure to bonds, equities etc) and whether you are overexposed to any particular asset type
- how good the funds are that you currently hold
You can then generate and print a full report. You will also see a bespoke volatility rating for your portfolio (a measure of how your portfolio's value fluctuates up and down) versus the market. This is useful to know as you can use it to gauge how your portfolio will react in a market rally or sell-off.
Step 2 - Find out your attitude to risk scientifically
The chances are that after you have produced your report you will have concerns over the level of risk your portfolio is taking, maybe too much risk or maybe too little. The risk level should match your own tolerance of investment risk (also known as your attitude to risk). The best way to independently assess your own attitude to risk is by using an online risk tolerance tool. Simply answer the 10 quick multiple choice questions and you will discover your attitude to risk.
Once you have the result compare this to your portfolio's risk profile from step 1 and then note down whether you need to increase or decrease the level of risk within your portfolio.
Step 3 - Prune
The tool in step 1 should will have highlighted those funds within your portfolio which need reviewing. Make a note of these funds.
If you have a financial adviser then I suggest that you arrange a meeting with him/her to discuss the outcome of the above review. Otherwise the key is to now ensure that you construct a portfolio which:
- is well balanced (asset allocation)
- takes a level of risk that matches your attitude to risk
- contains strong performing funds
You now have two options, either you can choose the funds yourself or instead opt for a portfolio run on your behalf. Either way I recommend using a good third party portfolio builder such as portfolio plus*. Simply select the risk level that most closely matches your risk tolerance (as established in step 2). The tool then gives you a suitable asset allocation as well as a suggested managed portfolio that can be run on your behalf. However, if you plan on selecting your own funds the tool also shows the top 10 fund holdings for the portfolio that best suits your risk profile. Note these down while being mindful of how they will fit into your existing portfolio and their impact on the portfolio's risk profile.
Photo by Salvatore Vuono via freedigitalphotos.net