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6 Steps to Assessing Your Investment Portfolio

Portfolio assessments on a regular basis are crucial to the profitability of your investments, especially after the volatility in the stock, bond, and currency markets. Unfortunately, many expats never examine their portfolios, or if they do, they do not approach the process in a prudent manner that will provide better outcomes over time.

It’s not about trying to predict market movements or picking the next hot stock. Instead, the major goal of portfolio monitoring is to keep things on track, uncover problems early, and ensure that your entire investing strategy remains focused on your financial objectives. You should already have a financial strategy in place, as well as defined, quantifiable goals and a clear understanding of how your investment portfolio will support those goals.

How frequently should you review your portfolio?

It is not required to monitor your portfolio every day, week, or even month; quarterly or semi-annual checks would be sufficient. This is done to keep things moving forward without becoming an extra strain.

When evaluating your portfolio, follow the steps outlined below. They keep you focused on the most critical areas to handle and save you time with a targeted, systematic approach.

1. Ensure that your asset allocation is on track

This is one of the most critical factors to consider since the allocation of your assets across cash, fixed income, and stocks will largely influence your long-term returns, volatility, and likelihood of meeting your goals.

The weightings given to various asset classes should be specified in your financial plan and, if you work with a financial consultant, in an investment policy statement. Check if your current weight is consistent with your plan. There is no reason to make adjustments for a few percentage points only to incur additional costs and/or taxable profits. However, if your present weights differ by more than 5%, it’s time to make some changes.

Examine not only the broad distribution of cash, fixed income, and equities in your portfolio but also the weightings for each asset type. Not all asset classes have the same level of volatility or risk/reward. For example, although the predicted return for emerging market equities is similar to that of developed market equities, the volatility is roughly twice as great. While adding uncorrelated asset classes to a diversified portfolio might improve the risk-return profile, you must also ensure that certain of your portfolio’s more volatile asset classes, such as emerging markets and small-cap stocks, do not overwhelm the others. In general, you want to avoid increasing volatility and risk in your portfolio without significantly improving its expected return.

2. Check your currency exposure

This is especially important for expats. By currency exposure we mean the portfolio’s underlying economic exposure, not just the portfolio’s cash position or reporting currency. For example, if you buy bonds in Australia in a USD-denominated portfolio, the reporting currency will be USD, but the actual currency exposure affecting investment returns will be AUD. Similarly, if you buy large-cap European stocks, you get the returns on those stocks, but you also have exposure to the EURO. It doesn’t matter if the portfolio containing these stocks is reported in USD, EUR, or any other currency.

To avoid a currency mismatch, it is important to try to identify what financial goals or future obligations the portfolio needs to fund.

The portfolio currency and asset mix can also be identified in your financial plan and, if you work with an advisor, detailed in your investment policy statement. Verify that the currency remains consistent with the currency of the future liabilities your portfolio needs to fund. This is especially important for the fixed income portion of the portfolio, where currency volatility can easily outweigh fixed income returns.

3. Examine your portfolio’s maturity or interest rate sensitivity

With lending rates still low, they just have one option. And, because bond prices fall when interest rates rise, you’ll want to know how sensitive your portfolio is to rising interest rates. Interest rate sensitivity is commonly defined in terms of “duration,” which is measured in years. For example, if your portfolio has an average term of 4.5 years, the fixed-income portion of its value will fall by about 4.5% for every 1% increase in interest rates. The longer the term of your fixed income, the more sensitive it is to changes in interest rates.

Fixed-interest terms of more than seven years should be avoided. Consider restricting your fixed income allocation in the short term (1-3 years) and medium term (3–7 years) to offset the impact of rising interest rates.

4. Examine your portfolio’s fees

Examine the fees you pay for each fund or position in your portfolio and total the charges for your entire portfolio. In general, you should not pay more than 1% on the total portfolio, and if you are efficient, you may reduce costs to 0.70%–0.50%.

Cost control is critical to generating good long-term investment returns. When you consider that most portfolios’ long-term real returns (without inflation) will average only 3%–5%, you can see why. If your portfolio has averaged 8% per year over time and inflation has averaged 4%, the portfolio’s real growth (or increase in purchasing power) is just 4%. Because the portfolio must expand by 4% each year to keep up with inflation, all costs are deducted from the portfolio’s true return. A 1% fee is a 25% tax on the portfolio’s 4% real return and will considerably diminish the portfolio’s long-term growth and value. Fees of 2%–5% or more, which are common in offshore expat investment markets, can wipe out 50%–100% of your actual gains.

Reducing unnecessary spending is the quickest and easiest way to boost your portfolio’s returns without introducing risk. If you pay more than 1%, you must have a compelling cause.

5. Determine whether you are maximising tax-advantaged arrangements

If you have tax-advantaged structures in place that are subject to tax on your portfolio, make sure you use them appropriately. Because this asset location selection is largely dependent on the investor’s specific situation, applying hard rules of thumb is challenging. However, you should think about putting high-yield assets or tactical positions in tax-exempt investment entities.

According to studies, the prudent use of tax-advantaged structures can increase an investor’s after-tax return by up to 1%. This can be a tricky issue, so you may want to talk with a financial consultant to make the most of your position.

6. Monitor your portfolio’s performance

At each review, keep track of and monitor your performance. The emphasis is less on quarterly results, which are particularly valuable for illustrating short-term volatility. Instead, concentrate on what you can expect in the long run, such as establishing a track record of performance over three to five years or more.

You may evaluate how your portfolio is performing over time, how much volatility it contains, if certain holdings are contributing as expected or not, and whether you’re on schedule to meet your goals by tracking your performance. You should assess your portfolio quarterly, but take the performance (good or bad) of each quarter with a grain of salt. Instead, consider your overall performance and whether you’re on course to meet your financial objectives. There is no data to base judgements on if performance is not tracked.

Assessing your portfolio may appear time-consuming at first, but we are here to assist.

Once you’ve set everything up and completed a few assessments, you’ll discover that it doesn’t take much time and will considerably boost your chances of meeting your financial goals!

Contact us today for a no-obligation conversation.

We advise expat clients around the world.