If you search online you’ll find many investing websites which talk about ‘set and forget’ portfolios. It’s not an uncommon scenario for rookie investors to take advice, often from so-called experts with dubious qualifications, invest their savings in a portfolio and then not spare it another thought for months or even years.
While I’m not a proponent of tracking daily performance and constantly buying and selling, generally favouring a buy and hold approach, I do believe that investing requires a little more effort than the ‘set and forget’ approach.
That’s why I’ve put together a list of questions for investors to run through. If you can’t answer yes to all of these, I’d suggest that it might be time to seek a second opinion on your portfolio of investments to ensure that they are right for you.
Do you understand the level of risk in your portfolio?
Portfolios are generally made up of a mix of equities, commodities, fixed income investments, such as bonds, cash and possibly property. Within each of these categories individual investments will also carry varying risk. Asset allocation can be adjusted by changing the percentage of the portfolio invested in each category. Equities, for example, are high risk so a portfolio containing a high proportion of stocks will carry more risk. Do you know what percentage of your portfolio is invested in each asset category?
Do you know if the level of risk in your portfolio is appropriate to your situation?
Risk is an unavoidable consequence of investment but it can be managed in order to match each investor’s risk tolerance. That can be calculated by taking into account goals, investment timescale and a client’s personal attitude to risk and volatility. Here at Infinity we take that very seriously and use a sophisticated risk profiling tool to assess each client’s tolerance to risk. Not all financial advisers do. This is a particularly pertinent question for those approaching retirement. Sticking with the same asset allocation you chose in your 20s or 30s is a bad idea – you need to lower your risk as you get older to protect your nest egg against volatility.
Do you have a concrete financial plan?
A financial plan should be put down in writing outlining your specific investment goals and how you will achieve them. This acts as a roadmap to guide your financial planning decisions. Without a map, how will you know where you are going? Checking in with your roadmap every few months will allow you to see whether you are on course to achieve your goals or if need to make some changes to your portfolio. The plan will also need adjusting at times as goals change, especially when you experience major life changes like getting married, divorced or having a baby.
Do you know if you are investing in a tax-efficient manner?
This is a particularly thorny issue for expats who may have savings in difference countries and currencies and be liable for tax in more than one country. Often I see clients who would be better off consolidating their investments to make their finances more tax efficient. There is no one-size-fits-all answer to this so it’s important to seek advice from an expert in cross-border tax planning.
Do you know the costs associated with your portfolio?
It is vital that you understand how you are being charged for the services you are benefitting from in relation to your portfolio. Investment expenses can include account fees, advisory fees, transaction charges, commissions and so on. Many advisers are not transparent about fees but here at Infinity we welcome recent moves towards a fee-based system to improve transparency within the industry. We feel that this is more professional and makes clear to customers exactly what advice they are paying for. It also means we can deliver appropriate products and advice without being beholden to individual providers.
Do you understand how the performance of your portfolio is evaluated?
You will undoubtedly have seen the phrase ‘past performance is no indicator of future returns’, or similar, in relation to your investments. There are a number of different ways of measuring performance. For a buy-and-hold investor looking to invest for the next 20 years, for example, a short term rise or fall in the value of a share is less important than potential earnings growth of the company. Someone approaching retirement may be more interested in income generation. You need to look at how your investments are performing against clear benchmarks. That is made easy for Infinity clients because our investment management partner, Tilney, conducts rigorous research on funds to ascertain whether they are underperforming against their benchmarks, highlighting consistent underperformers and adjusting their funds accordingly. That’s reassuring for investors.
If you can answer yes to all the above questions, you probably have your financial planning all sewn up. If not, there’s no need to panic but it’s probably time to seek a second opinion to review your portfolio and ascertain where improvements can be made to ensure you are on track to meet your financial goals.
I’m currently offering free consultations to investors wishing to review their portfolios so if you have any doubts about your investments, why not give us a call or email us at info@infinitysolutions.com?
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