Calendars will soon tick over into December, meaning Christmas and (for many of us) a well-earned break are just a few weeks away. It also gives us a chance to reflect on what’s happened during the year. For investors, this can provide an opportunity to consider how lessons from 2023 might influence your investment approach in 2024.
Disciplined investors use this time of year for an annual portfolio review. This is important because even if you haven’t actively altered your portfolio mix during the year, the contents of your portfolio might have shifted in line with changing valuations, interest rates and other variables.
To help pull together the following checklist, I enlisted the help of a few wealth managers:
Jason King, executive adviser, Viridian Advisory
Sally Huynh, private wealth adviser, Shadforth Financial Group
Tim Sullivan, partner and private wealth adviser, Integro Private Wealth
Wealth managers typically refer to specific triggers for either creating a financial plan or reviewing an existing one. These milestones can include buying or selling a house, a new marriage (or divorce), career change, children moving out of home, or even retirement from full-time work.
The end of the calendar year, while not a milestone of a similar scale to those mentioned above, “can be a signpost for people to reset and refocus,” says Jason King, executive adviser at Viridian Advisory.
“In the Christmas shutdown period, people tend to take stock of what is important,” King adds.
This thinking should also be tempered by the current economic environment, especially given the high cost of living. How this changes your portfolio setup can vary depending on your initial goal. For example, if your portfolio is laser-focused on capital growth, King suggests there may be the potential to “turn on” further liquidity in the form of payments or distributions.
“This review should include measuring how investments have performed relative to the benchmark you set out to achieve, including a comparison against other ‘like for like’ options available on the market,” says Shadforth Financial Group’s Sally Huynh.
“If an investment has underperformed for the year, that doesn’t necessarily mean investors should switch. Rather, it is important to understand why the underperformance occurred and if it is to be expected given the strategy being adopted."
Integro Private Wealth’s Tim Sullivan emphasises weighing the forward-looking expected return against the potential risks.
“And then rebalance if necessary to ensure the overall portfolio aligns with these long-term goals and risk tolerances.”
“This can sometimes mean having a contrarian view and reducing some parts of the market that are outperforming and reallocating to parts of the market where there are more attractive valuations or better potential risk-adjusted returns.”
Considering how you’re positioned across different asset types such as stocks, bonds, and cash sounds like a no-brainer, but it’s easily overlooked. Most wealth management firms will have a formalised process for assessing this.
“It's essential because it impacts risk and return profiles,” says Integro’s Sullivan.
“The process involves evaluating current allocations versus target allocations, considering how market changes have affected the portfolio, and making adjustments to align with investment objectives and risk tolerance.”
“We aim to understand the current market environment, using a valuation dashboard for decision-making to balance the risk and reward profile of our portfolio to align with client objectives.”
The wrong asset allocation is important for other reasons, too, as Shadforth’s Huynh explains.
“An inappropriate asset allocation could lead to unnecessary financial stress/anxiety or unwanted wealth destruction.”
She recommends working with a qualified financial adviser, who can test your risk tolerance against various scenarios alongside your short-, medium- and longer-term goals.
The potential for automation of this process is another benefit of using an adviser, as Viridian’s King explains. Many tools used by advisers will enable you to reset or reassess your overall attitude to investment risk.
“Ultimately what comes out of that is a target asset allocation, then it’s an assessment of what your overall portfolio looks like compared to that,” he says.
Just how much cash you should hold in your portfolio varies greatly depending on individual circumstances. As with most financial matters, it will differ widely between those who are in “accumulation” mode (they’re still working and earning an income) versus those in “drawdown” (most frequently, this means you’re retired and living on investment income).
For retirees, King suggests your on-hand cash balance should be enough to cover between one and three years of living expenses.
And if you’re an accumulator, he says your portfolio should include at least one year’s worth of income in liquid investments, including cash. A key point here is anticipating any major expenses in the year ahead. For example, you might be planning a new car purchase, home renovations or a holiday. The estimated cost for such things should also be factored into your portfolio liquidity for the coming 12 months.
Be like the climate, not the weather.
Huynh makes a key point here, too: “When considering asset allocation, investors should view it like a ‘climate’ whereas regular reviews are like the ‘weather’.”
“The climate moves slowly compared to the weather, which changes daily. Unless there’s a major shift to your situation or goals, or there are significant economic and legislative conditions, the strategic asset allocation should be maintained.”
As alluded to in point two, a prudent risk profile is an important part of your portfolio’s overall asset allocation.
“You need to assess your short, medium, and long-term assets. For example, long-term is your super, medium-term is your direct equity portfolio and other ex-super investments, and short-term is your bank savings,” King says.
“In some ways, there is almost a different asset allocation for all those different components. And within that, knowing that different assets attract taxes in different ways, you need to understand the underlying structure that best suits those.”
For example, King says growth-based assets expected to see significant capital gains over time are “arguably” better off in an environment that’s sheltered from tax. The most common of these is superannuation but can also include trust arrangements or jointly held structures.
A theme that has been dominating market discussions for the last two to three years, this issue is top of mind for individual investors.
Integro’s Sullivan says his team has been “progressively adding to duration within fixed interest as yields have risen.”
“The attractiveness of traditional bonds has returned from an income generative perspective but also as a diversifying component in the overall portfolio as a potential to provide negative correlation with equities,” he says.
Within the portfolio’s equities component, Sullivan also favours global small caps, emerging markets, and Australian small caps “as areas where we see reasonable growth prospects for more reasonable valuations.”
“Overall, we are slightly defensively positioned with an underweight to equity markets overall, with some of that placed with a slight overweight to fixed interest as well as a minor allocation to gold. We feel this positions us well for any economic headwinds we may face, and we at least get paid to wait now that fixed interest and cash yields have improved,” Sullivan says.
Viridan’s King also discusses the “flight to quality” such environments create – traditionally in real assets, including commodities such as gold, property, and blue-chip shares. “These have been proven over the long term to assist clients in mitigating the impact of higher inflation,” he says.
Following on from the above point about inflation protection, King emphasises you should look for investments that are less correlated to high levels of debt. In simple terms, this means considering “quality” stocks.
“And be wary of the fact that while cash is paying a higher return, those levels of return are still lower than the inflation rate – so beware of having too much cash,” King says.
“It’s not really a hedge in terms of inflation protection – that’s a short-term hit but it’s not protecting you against inflation. It’s about making sure you’re well-weighted, that means selling some winners to trim the gains.”
King also suggests this year-end is a good time to consider the nuts and bolts of how you invest in stocks – particularly for those in wealth accumulation.
“In volatile times like this, when there is so much uncertainty, take advantage of dollar cost averaging opportunities. This means drip-feeding money into your portfolio on a regular basis or establishing a plan to do that.”
This article was originally published on Livewire Markets.
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