Tips for your 2022 Portfolio Strategy Review

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By Sara Sorensen

With 2021 in the rearview mirror, many investors are taking advantage of the new year to review their investment portfolios. Fisher Investments UK believes it’s a good idea to review your portfolio strategy at least once a year to ensure it continues to meet your long-term investment goals. In this article, we’ll share some tips to help you get started.

Review your asset allocation

Performance may seem like a natural starting point for a portfolio review, but we think there are other factors you should consider first, such as asset allocation. Asset allocation is the combination of a portfolio of stocks, fixed interest, cash and other investments. Fisher Investments UK believes that asset allocation is the main driver of long-term portfolio returns.

Many financial professionals use age as the primary factor in determining your optimal mix of assets. Age is a key factor, but some overly simplistic rules like “take 100 and subtract your age to get the percentage of stocks in your portfolio” can be too general and ignore your personal financial situation. You should consider other important factors such as health status, family history, income needs and investment objectives.

Imagine two hypothetical investors of the same age. Investor A has a pension, is in good health and wants to leave an inheritance to his children. Investor B has no pension, is in poor health, and wants to spend all of his assets before he dies. Although these two investors are the same age, they have unique circumstances and investment goals. Investor A would probably need a more growth-oriented asset allocation with a higher percentage of equities. Investor B’s asset allocation would likely include fewer stocks focused on short-term stability and cash flow. Personal circumstances can vary widely and your asset allocation should be tailored specifically to your needs.

It is important to note that if your investment objectives and financial situation have not changed from the previous year, you may not need to change your asset allocation. If your personal circumstances have changed due to an event such as a loss of additional income, increased expenses, or a change in health status, you may need to adjust your asset allocation accordingly.

Select an appropriate benchmark portfolio

Selecting an appropriate benchmark to use for your portfolio review is an often overlooked part of a prudent investment strategy. Benchmarks help you maintain good portfolio diversification and gauge portfolio performance. If your portfolio deviates too much from your benchmark in any category, you may be taking on too much benchmark risk and may need to make portfolio adjustments to bring it back in line. Additionally, if you have decided that a change in your asset allocation is appropriate, you may also need to adjust the benchmark you use accordingly.

Choosing the right benchmark depends primarily on the composition of the sectors and countries of origin of the securities in your portfolio. Multiple benchmarks can apply to different asset classes in your portfolio. In most cases, an appropriate portfolio benchmark will be a broad equity or fixed interest index, such as the MSCI World, or ICE (NYSE:) BofA 7-10 Year Corporate-Government Bond Index. For example, if the bulk of your portfolio is concentrated in fixed-rate securities, using an all-equity index like the MSCI World would make no sense. Likewise, if the majority of your stock holdings are in non-US-based companies, the US-only S&P 500 is not an adequate benchmark. Selecting the right benchmark lays the foundation for successful investing and is one of the most important things an investor can do, according to Fisher Investments UK.

Maintain good diversification

After selecting an appropriate benchmark, the next step is to look at the diversification of your portfolio. To achieve good diversification, you need to hold a wide range of securities from different countries, sectors and asset classes, which helps to spread investment risk and generally results in lower volatility. The logic being that as one security goes up in value, another may go down.

Too often, investors allocate a large portion of their portfolios to a security or sector they believe will perform well, creating significant concentration risk. Securities concentrated in one sector tend to move in sync, which can be very costly if you get it wrong. For example, if utilities underperformed last year and most of your portfolio was allocated to this sector, you probably had poor returns. Even a year of very underperformance relative to the market can have serious consequences for your retirement.

According to Fisher Investments UK, most individual investors can benefit from maintaining a globally diversified portfolio with exposure to most sectors and various geographic regions. Global diversification can help reduce portfolio volatility while allowing you to take advantage of more investment opportunities. You can allocate more of your portfolio to areas that you think will do well and allocate less to areas that you think will lag behind, within reason. Ultimately, the primary benefit of diversification is better risk management.

Stay disciplined to your strategy

Creating a long-term investment plan can help you stay the course when the markets feel scary. Fisher Investments UK recognizes that investing is difficult and emotionally draining. Why? Because humans are often influenced by emotions and tend to make investment decisions based on fear or greed, which can jeopardize any investment plan. Annual portfolio reviews can help you stay focused on your long-term plan and provide important insight into your progress toward retirement and other investment goals. We believe that patience and discipline are two of the most important behaviors for successful investing, especially in difficult market environments.

Interested in planning your retirement? Get our current insights, starting with a copy of 10 Retirement Investing Mistakes to Avoid.

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Fisher Investments Europe Limited, trading as Fisher Investments UK, is authorized and regulated by the UK Financial Conduct Authority (FCA number 191609) and is registered in England (company number 3850593). Fisher Investments Europe Limited has its registered office at: Level 18, One Canada Square (NYSE:), Canary Wharf, London, E14 5AX, United Kingdom.

Investment management services are provided by Fisher Investments UK’s parent company, Fisher Asset Management, LLC, trading as Fisher Investments, which is established in the United States and regulated by the United States Securities and Exchange Commission . Investing in the financial markets involves a risk of loss and there is no guarantee that all or part of the capital invested will be reimbursed. Past performance does not guarantee or reliably indicate future performance. The value of investments and the income from them will fluctuate with global financial markets and international exchange rates.

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Don F. Davis