Take time for a portfolio review

Take time for a portfolio review

Rebalancing may be needed to avoid risk distortion


Stock markets were on a tear last year. The S&P/TSX Composite was up 21% in 2021, while the S&P 500 Composite Index rose 27%. But trouble may be brewing, with inflation still raging and interest rate hikes looming. After a year of solid investment gains, it’s easy to become complacent. But that could mean courting financial trouble. Unless you have a complete picture of your portfolio, including holdings, performance, and asset allocation, your investment picture could in fact be a lot riskier than you thought. An annual portfolio review not only tells you how your portfolio has performed against your benchmark, but whether it’s time to make changes to your holdings. Here’s how to get a start.

1. Check performance

Review your portfolio annually to see if performance has matched your short- and long-term objectives. This might seem a no-brainer, but in fact it might be more complicated than you think. For example, if you have separate registered and non-registered accounts at different institutions, they may not be set up as a complete portfolio. Check and review all investments in all accounts in total. One lagging area could be dragging down your overall performance.

2. Sort your assets and rebalance

Safety, income, and growth assets make up a typical portfolio. The weight of each determines both the overall risk of your portfolio and the the return you can expect. If your allocation is skewed by large gains in one class over the year, say equities in 2021, your risk profile will change. Your portfolio may have become overweighted in equity, exposing you to more risk than you are prepared to accept.

If you find your portfolio has become overweighted in one asset class, you can take steps to “rebalance.” This is something of an art, because it involves selling selected assets in one category and purchasing assets in another in order to restore your portfolio to your target allocations and risk profile. Of course, this can have tax implications, as well as transaction costs.

3. Portfolio diversification

Your annual portfolio review is also a good time, not only to rebalance weightings back to your original target, but to determine whether your portfolio is appropriately diversified. Sort your holdings into basic categories, like materials, conglomerates, consumer goods, financial, healthcare, industrial, services, technology, and utilities. Don’t forget to examine the holdings of any mutual funds or exchange-traded funds, because the holdings of these can affect your asset mix considerably.

Diversification is at the heart of risk mitigation. It doesn’t make a lot of sense to hold only one bond and one stock. Ensure individual asset classes contain a sufficient number of individual securities drawn diversified by region, market capitalization, sector, and so on, to achieve your desired risk level. The same goes for bonds, where you’d hold a mix of federal, provincial, and corporate bonds, further diversified by yield and duration.

4. Review investment funds

Investment funds are typically already diversified internally. Each fund breaks down its holdings by category, sector, and region on dedicated fund information pages and fact sheets located on the fund company’s website.

If you’ve diversified by investing in mutual funds or exchange-traded funds, review your funds’ performance over the past year and compare it with your investment rationale. Have there been changes in fund management or mandate (in the case of mutual funds) or to index methodology, liquidity, or ownership (in the case of ETFs)? Investment funds are frequently closed, merged, and renamed. Make sure such funds still deliver what you expect. If not, consider switching.

5. Getting help

If your portfolio has outgrown your ability or desire to manage it, consider consulting a qualified fee-for-service financial advisor who will undertake your portfolio review, sort your holdings into a spreadsheet, and suggest a cost-effective course of action if one is necessary to bring your portfolio in line with your tolerance for risk and your longer-term financial objectives.

Robyn Thompson, CFP, CIM, FCSI, is the founder of Castlemark Wealth Management, a boutique financial advisory firm specializing in wealth management for high net worth individuals and families. Contact her directly by phone at 416-828-7159, or by email at rthompson@castlemarkwealth.com for a confidential planning consultation.

Notes and Disclaimer

Content copyright © 2022 by Robyn K. Thompson. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned are illustrative only and carry risk of loss. No guarantee of investment performance is made or implied. It is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. Please contact the author to discuss your particular circumstances.