How to properly review your investments?

JohnWinder

A lot of wisdom in those answers.

1. Before the review, pray it's well down so that the upcoming contributions, either dividends or from you, get you bargain prices.

2. Check that it's still tracking the index it's meant to, as well as is reasonable. Beware results better than the index, as unacceptable risks might be being taken.

3. Check that the managers haven't done anything undesirable, like changed their strategy to be a synthetic fund, or do extravagant securities lending to try to juice up the returns.

4. Update the relevant capital gains records if that's going to make it easier for you than in 30 years time.

5. Check that the number of units or other features of your investment is 'correct', as a check on whether anyone is defrauding you slowly.

6. Check that the management charge is still reasonable.

7. All the other sensible stuff in earlier posts to do with meeting your goals and matching your risk tolerance. These might be more like 5 yearly tasks.

BananaRepublic

JohnWinder makes some very good points, 

You only have one fund, which leaves you little room for manoeuvre. Ideally over time you will build up a portfolio of funds, I have over 20 for example. That will allow you to diversify over many markets and sectors.

As said earlier, you need to check that each fund is performing in line with its index (preferably better), and that the index looks good. If the index is going down, you have to make a judgement regarding its future returns, and either get out, thereby crystallising losses, or hunker down and risk further losses. Over 20 years ago I made the mistake of keeping £6,000 in a Japan fund rather than moving it, and accepting short term losses for long term gain.

You also want to keep an eye open for speculative bubbles, such as the dot com boom, and take appropriate action eg gradually move out of that market ie taking profits. In the same vein, if a market looks overvalued, you need to reconsider your investments. The US tech stock market is rather exuberant, however I have decided to remain in that market because the long term outlook is very good even though we could easily see a 20% drop this year or next. 

A final point to add to JohnWinder’s list:

8) Look at the companies inside each fund. You don’t have to analyse their balance sheets, but at least look at the geographical distribution, the sectors covered, and the size of each company. Your global fund is an ideal example. I bet it has more than 50% in the US, and a large investment in tech stocks. People will say that is fine because the US is such a large market relative to the rest of the world but it does have undue exposure to one region. 

Finally don’t forget that you will make mistakes and you cannot predict the future, but you can reduce risk and increase the likelihood of gains. 

Linton

I would reverse the priority order given in some replies...

A pre-requisite of a review is to have clear objectives and a strategy and plan for meeting them.   If you are saving for your retirement you should know how much money at current prices you will need to stop working and when.  So it is straightforward to calculate from a spreadsheet model where you need to be at the end of each year.

The first step in a review is to check the basis of the plan.  Have your objectives changed? Have your circumstances changed? If necessary update your strategy and plan.

Given a valid plan you can review progress.  If this is falling below target you could reconsider your contributions  - for perhaps the first 10 years the greater part of the increase in your retirement pot will come from new contributions, not investment growth.  Or more fundamentally you may wish to revisit your objectives and your strategy/plan.

The third stage is to review your investments at the high level. Do the overall allocations to underlying assets still correspond to those you chose when you bought the funds?  If not what are you going to do about it?

Finally you can look in detail at your individual funds in isolation.  Do they still satisfy your reasons for buying them? Are those reasons still valid?  If not reconsider your portfolio of funds.

To make a point, one thing I have deliberately not included is the performance of individual funds in absolute terms, against some possible replacements, or against an index were any to be relevent.  You need to accept that individual funds will behave differently at different times - that is why you bought them. If they dont follow the index it doesnt matter - if you wanted to follow the index you would have bought a tracker.  All that does really matter is the performance of the portfolio against your requirements.

Thrugelmir

TheLittleSaver said:

Albermarle said:

In other words just leave it alone and do not be tempted to fiddle with it .

I guess a question like this would arise once/if I will feel a bit more adventurous with my investments.

I suspect you that you don't appreciate how volatile your investment could potentially be. Nor that it might not be the solution to your final objective. 

TheLittleSaver

Thanks @JohnWinder for the list, lots of wisdom indeed!

JohnWinder said:

2. Check that it's still tracking the index it's meant to, as well as is reasonable. Beware results better than the index, as unacceptable risks might be being taken.

Sorry for the silly question, but what do you mean by that? It can even change index overtime? And what do you mean by "results better than the index"? How do I check that?

3. Check that the managers haven't done anything undesirable, like changed their strategy to be a synthetic fund, or do extravagant securities lending to try to juice up the returns.

What managers? I only have a Global index fund, I din't invest in any package, like Vanguard LS, if that's what you mean?

4. Update the relevant capital gains records if that's going to make it easier for you than in 30 years time.

That's something I was considering, good point.

5. Check that the number of units or other features of your investment is 'correct', as a check on whether anyone is defrauding you slowly.

How can I check that? And does this apply even if I am investing on an index fund by myself?

6. Check that the management charge is still reasonable.

it's 0.13%, I think it's good, right? But I guess you mean once I have so much money that a percentage fee would not be ideal?  In which case, are there funds that have fixed fees?

BananaRepublic said:

You only have one fund, which leaves you little room for manoeuvre. Ideally over time you will build up a portfolio of funds, I have over 20 for example. That will allow you to diversify over many markets and sectors.

Yes, I you are right and I might add more funds overtime. What kind of approach would you suggest? Each year buy a different fund with the £4,000 I put into my LISA and use the £1,000 bonus to top up the previous one?

8) Look at the companies inside each fund. You don’t have to analyse their balance sheets, but at least look at the geographical distribution, the sectors covered, and the size of each company. Your global fund is an ideal example. I bet it has more than 50% in the US, and a large investment in tech stocks. People will say that is fine because the US is such a large market relative to the rest of the world but it does have undue exposure to one region.

You are right, it's 59.70% North America, 19.08% Europe, 21.21% Asia. So, what would you pick as the next fund? Although I guess this might be a question for next year, (or anyway in April, if I manage to put another £4,000 so soon).

Finally don’t forget that you will make mistakes and you cannot predict the future, but you can reduce risk and increase the likelihood of gains.

Absolutely right.

Thrugelmir said:

I suspect you that you don't appreciate how volatile your investment could potentially be. Nor that it might not be the solution to your final objective. 

What do you mean? I understand there is a risk, as there is an intrinsic risk in any investment, but with the little I know I understand that, considering how far I am from retirement, I can manage the ups and downs of the fund, as long as I keep it cool about it and make my choices not purely based on this or that year performance... if that makes sense? That's why I was asking if there is any other thing that I should look at to review my investment, rather than just performance.

If by "it might not be the solution to your final objective" you mean that I would change fund, or add new ones over time then of course. Unless you mean something else?

TheLittleSaver

Linton said:

A pre-requisite of a review is to have clear objectives and a strategy and plan for meeting them.   If you are saving for your retirement you should know how much money at current prices you will need to stop working and when.  So it is straightforward to calculate from a spreadsheet model where you need to be at the end of each year.

This is something so straightforward as important. Thank you @Linton

Thrugelmir

TheLittleSaver said:

Thanks @JohnWinder for the list, lots of wisdom indeed!

JohnWinder said:

2. Check that it's still tracking the index it's meant to, as well as is reasonable. Beware results better than the index, as unacceptable risks might be being taken.

Sorry for the silly question, but what do you mean by that? It can even change index overtime? And what do you mean by "results better than the index"? How do I check that?

3. Check that the managers haven't done anything undesirable, like changed their strategy to be a synthetic fund, or do extravagant securities lending to try to juice up the returns.

What managers? I only have a Global index fund, I din't invest in any package, like Vanguard LS, if that's what you mean?

4. Update the relevant capital gains records if that's going to make it easier for you than in 30 years time.

That's something I was considering, good point.

5. Check that the number of units or other features of your investment is 'correct', as a check on whether anyone is defrauding you slowly.

How can I check that? And does this apply even if I am investing on an index fund by myself?

6. Check that the management charge is still reasonable.

it's 0.13%, I think it's good, right? But I guess you mean once I have so much money that a percentage fee would not be ideal?  In which case, are there funds that have fixed fees?

BananaRepublic said:

You only have one fund, which leaves you little room for manoeuvre. Ideally over time you will build up a portfolio of funds, I have over 20 for example. That will allow you to diversify over many markets and sectors.

Yes, I you are right and I might add more funds overtime. What kind of approach would you suggest? Each year buy a different fund with the £4,000 I put into my LISA and use the £1,000 bonus to top up the previous one?

8) Look at the companies inside each fund. You don’t have to analyse their balance sheets, but at least look at the geographical distribution, the sectors covered, and the size of each company. Your global fund is an ideal example. I bet it has more than 50% in the US, and a large investment in tech stocks. People will say that is fine because the US is such a large market relative to the rest of the world but it does have undue exposure to one region.

You are right, it's 59.70% North America, 19.08% Europe, 21.21% Asia. So, what would you pick as the next fund? Although I guess this might be a question for next year, (or anyway in April, if I manage to put another £4,000 so soon).

Finally don’t forget that you will make mistakes and you cannot predict the future, but you can reduce risk and increase the likelihood of gains.

Absolutely right.

Thrugelmir said:

I suspect you that you don't appreciate how volatile your investment could potentially be. Nor that it might not be the solution to your final objective. 

What do you mean? I understand there is a risk, as there is an intrinsic risk in any investment, but with the little I know I understand that, considering how far I am from retirement, I can manage the ups and downs of the fund, as long as I keep it cool about it and make my choices not purely based on this or that year performance... if that makes sense? That's why I was asking if there is any other thing that I should look at to review my investment, rather than just performance.

If by "it might not be the solution to your final objective" you mean that I would change fund, or add new ones over time then of course. Unless you mean something else?

Volatility isn't to be confused with risk. Volatility is the speed with which the direction of travel change due to the unpredicatable nature of the investments held. Portfolios ideally should be built on diversification. Quick rich ideas work for the lucky few,  the majority get left with the crumbs. Investing should be treated as a marathon not a sprint. 

TheLittleSaver

Thrugelmir said:

Volatility isn't to be confused with risk. Volatility is the speed with which the direction of travel change due to the unpredicatable nature of the investments held. Portfolios ideally should be built on diversification. Quick rich ideas work for the lucky few,  the majority get left with the crumbs. Investing should be treated as a marathon not a sprint. 

What makes you think that I am after "quick rich ideas"? I only asked for suggestions on what I should consider while reviewing my investment.

That being said, thanks for the clarification about volatility vs risk.

Prism

TheLittleSaver said:

Thrugelmir said:

Volatility isn't to be confused with risk. Volatility is the speed with which the direction of travel change due to the unpredicatable nature of the investments held. Portfolios ideally should be built on diversification. Quick rich ideas work for the lucky few,  the majority get left with the crumbs. Investing should be treated as a marathon not a sprint. 

What makes you think that I am after "quick rich ideas"? I only asked for suggestions on what I should consider while reviewing my investment.

That being said, thanks for the clarification about volatility vs risk.

Its probably worth adding that nearly all financial indicators of risk do in fact refer to volatility or standard deviation. Its about the only easily measurable type of risk there is.

BananaRepublic

Linton said:

To make a point, one thing I have deliberately not included is the performance of individual funds in absolute terms, against some possible replacements, or against an index were any to be relevent.  You need to accept that individual funds will behave differently at different times - that is why you bought them. If they dont follow the index it doesnt matter - if you wanted to follow the index you would have bought a tracker.  All that does really matter is the performance of the portfolio against your requirements.

This does relate to an earlier point you made, but if a fund does markedly underperform compared to the benchmark, or its peers, you should ask why, and if this is likely to continue. Most active funds do of course underperform relative to the index. Not all indexes have a tracker fund.