Portfolio review: Ishara Rupasinghe Five tips to whip it into shape

To prepare for 2018 and beyond, these five key tips will help whip your investments into shape

While there are some signs that the Australian and global economies are looking healthier, we also continue to see low wage growth and low consumer confidence, particularly in Australia. With mixed signals and geopolitical risks persisting, how do you know if you have the right combination of investments for your situation? Here are five tips to help keep your investments on the right track.

1 DON’T LET FOMO TAKE OVER

It’s easy to develop the fear of missing out when you hear someone else boasting about great investment returns. But keep a cool head because achieving higher returns usually means taking on higher risk. Investment portfolios and super funds have performed reasonably well over the past decade, largely off the back of improved sharemarket performance. The reality is that being prepared for some volatility is an element of investing.

There are a number of geopolitical and big-picture structural risks that make it more challenging for investors, such as North Korea, post-Brexit Europe, ageing populations and central banks stepping back from money printing. The broader market has become increasingly more inured to these events – much like when you hear the same story or news over and over again you become a little bit numb to it.

What’s concerning about this is that current share prices may not factor in the true risks that investors are facing so it’s important to remain cautious. If you are overexposed and there is a market correction your portfolio could be impacted quite significantly.

TIP Review where your investments are and get a firm picture of what regions and countries you have exposure to. Your adviser or super fund reports should provide this detail at the touch of a button.

2 BE SELFISH – WHAT DO YOU WANT?

It might sound counterintuitive to challenge FOMO by being selfish but knowing exactly what you want from your investments over the short, medium and long term is the best way to keep on track. An annual portfolio review can help you do this. If you’re relying on income from the investments to cover day-to-day expenses, it’s a good idea to list your yearly living costs into core and discretionary categories, including big one-offs such as an overseas trip or home renovation. This is to check you have sufficient cash to cover it all or whether you need to liquidate assets.

If you expect yearly expenses to increase on a more permanent basis, perhaps from rising energy prices or increasing health expenses, you may want to adjust the amount of cash you hold within your portfolio. With interest rates still low, holding cash may not feel productive but the old expression “cash is king” still rings true. Cash provides a healthy buffer against volatility and provides flexibility. For retirees, consider holding three years’ worth of living expenses in cash, as this can help reduce the risk of having to sell in a downturn.

TIP Look at last year’s spending and add or subtract what’s changing in 2018.

3 UNDERSTAND RISK MANAGEMENT

A well-balanced portfolio is not just about maximising returns but also managing the downside risk. Good portfolio construction is like putting together a sports team. You need investments that work together for a common goal and complement each other to help to reduce volatility and smooth returns.

For example, a portfolio that’s largely exposed to shares could offer the potential for high returns but shares also experience negative returns – typically expected four or five years out of 20. If you can’t afford to lose any money or the thought of loss keeps you up at night, you need to make sure you have enough balance in your portfolio to act as a safety net. Retirees who need regular ongoing income generally should have a different portfolio focus compared with a pre-retiree at their highest earning income level or a younger worker with a safe level of income. Understanding this is important for how you approach diversifying your investments.

TIP Talk to a professional investment adviser about the balance that’s right for you. Make sure you take your reports with you, ask questions

and make notes. But be aware that it may take a few meetings to work through, particularly if you have a large portfolio or complex investments.

4 BE FUTURE THINKING

When thinking about what lies ahead, it’s not about having a crystal ball but being aware more generally of big future challenges so you know where to look for investment opportunities. Renewable energy, for instance, is critical for the sustainability of our future and increased awareness of this has seen greater investment in solar and wind technology over the past decade.

We’re also seeing many industries being disrupted by rapid technological advancement. Over the past 10 years consider how traditional bricks-and-mortar retail stores have come under pressure from online shopping, and artificial intelligence (AI) is leading another huge wave of disruption through innovating products and services with the potential to reduce costs. We’ve seen benefits from AI already flow into the healthcare sector through improved diagnosis and decreasing procedural costs.

Where you invest should also keep up with these changes. If you’ve accumulated a lot of traditional industry or blue-chip shares, now is the time to question how they will hold up to disruption. It’s easy to become complacent, particularly if the stocks have been performing well or you’re familiar with the companies. But if they are not the same companies that will be growing over the next five to 10 years it might be time to update.

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Do your due diligence on new opportunities. If you need help, talk to an adviser you trust as you don’t want to waste time and money by chopping and changing because of lack of research.

5 AVOID TAX BILL SHOCK

After working out where the risks and opportunities lie, if you do need to adjust your portfolio by selling assets make sure you are aware of any tax implications. Then prepare a plan of attack to manage a potential tax bill. If capital losses have been carried forward from previous years, you may be able to use those to offset capital gains resulting from sales.

Or through making concessional and non-concessional contributions you may be able to shift investments into super, which can be more tax-effective than investing in your own name. But be mindful of your super contribution caps – the penalties can be harsh if you go over.

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Talk to a qualified tax professional if you need help understanding your portfolio’s capital gains tax position and available super caps.

On the surface, the potential for growth looks better for 2018 but there’s an iceberg of risks for investors to navigate around. Make sure your portfolio is set up for what you want and what may lie ahead.