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Tips for 2018 portfolio health check-up

Photo of Ishara Rupasinghe, Dixon Advisory By Ishara Rupasinghe, Dixon Advisory

min read

How to assess whether your investments are still on track for the New Year.

Navigating investment markets can be hard at the best of times, but the geopolitical risks over the past 12 months have made it even more challenging. With missile tests in North Korea and uncertainty over US President Donald Trump's ability to legislate major policy promises on infrastructure and tax, tension in world politics continues to build.

Some specific events have affected the sharemarket but overall the year has seen the broader market become increasingly more subdued to geopolitical events – much like when you hear the same story or news repeatedly and become a little bit numb to it.

What is worrying about this is that current share prices may not be factoring in the true risks investors are facing.

In Australia, themes from last year have persisted, with concern around the direction of interest rates, the discussions around a potential property bubble and commodity price uncertainty. Recent strength in the Australian dollar is also putting pressure on some industries and making the Reserve Bank’s job of balancing the economy more challenging.
 
So, for this year’s annual portfolio health check-up list, here’s five key things to help assess whether your investments are still on track.

1. Does it still meet your goals?

First, consider whether your portfolio is still in line with your short and long-term goals. If you are relying on income generated to cover day-to-day expenses, list your yearly living expenses into core and discretionary items, including one-off big expenses such as a trip overseas or a renovation.

This is to check if you have sufficient cash to cover it or if you need to liquidate assets. If you anticipate yearly expenses to increase on a more permanent basis, perhaps from rising energy prices or medical expenses, you may want to adjust the amount of cash held in your portfolio.

Holding cash may not feel productive, but the old expression “cash is king” still rings true. We highlighted the importance of this last year and it is still just at relevant, as cash provides a healthy buffer against volatility and provides flexibility.

Unfortunately, as interest rates are still low it is worth hunting around to find the best rates on offer. For retirees, consider holding three years’ worth of living expenses in cash, which helps to reduce the risk of having to sell in a downturn.

Overall, if your goal is for the portfolio to reach a certain value, do not chase returns by taking on excess risk. If you need to adjust asset allocations, be sure the adjustments are still aligned with your risk appetite.
 
2. Don’t let FOMO take over

It is easy to develop FOMO – the fear of missing out – when you hear someone else boasting about the great returns they are getting, but what you may not know is exactly what investments they hold. They could be invested in higher-risk assets and be quite comfortable with, or unaware of, the potential downside.

The reality is that being prepared for volatility is an element of investing. With the overall broader market subdued to geopolitical events, it is important for investors to remain cautious. If you are over exposed and there is a market correction, your portfolio could be affected quite significantly.

In short, stay cautious, diversify and keep a healthy cash buffer.

3. Think outside the box

It is easy to become complacent and hold the same investments for years or stick to investments you are familiar with. If an investment has continuously performed well for a long time, there may be a greater chance that it could start to taper off, so remain watchful.

Consider investments that have different performance drivers, to help reduce the overall risk level of your portfolio. Alternative yield-focused investments such as infrastructure and commercial property tend to be more defensively positioned than share investments and can add stable future cash flows to portfolios because of the long-term nature of the underlying contracts.

Consider overseas markets for these assets, where you get further diversification and exposure to different currencies.

When thinking about what lies ahead it is not about having a crystal ball but being aware of what is going on, so you know where to look for 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 are also seeing many industries being disrupted by rapid technological advancement. Over the past 10 years we have seen how traditional bricks-and-mortar stores have come under pressure from online retailers.

As the gains of one asset may offset the losses of another, diversifying broadly across different asset classes, with exposure to companies that have a proven ability to disrupt existing markets, could help protect your portfolio and income during market fluctuations – which is particularly important if you are close to retirement. But make sure you think about the practicalities of investing in alternative assets, and using a unitised fund can help minimise risk.

4. Think how other investment vehicles can work harder for you

After working out where the risks and opportunities are, if you need to adjust your portfolio by selling assets make sure you are aware of the potential tax implications and have a plan to manage a tax bill.

If capital losses have been carried forward from previous years, you may be able to use those to offset any capital gains resulting from any sales. Or through making concessional and non-concessional contributions you may be able to shift investments into super, which can be a more tax-effective investment vehicle compared to investing in your personal name.

Despite the big super reforms that came into effect on 1 July 2017, you can still hold up to $1.6 million free of tax in the retirement phase of super and if you have more, a maximum rate of 15 per cent applies. But be mindful of your super contribution caps because if you exceed them the penalties can be harsh.

5  Plan for the future

We don’t like to worry about how our finances will be managed once we have passed on or are no longer capable of looking after them ourselves.

In many families there is one person generally more involved in the finances and making investment decisions. If that sounds like you, you may feel burdened with the responsibility of making sure your family is secure when you have passed on.

As part of your annual portfolio review, think about who is likely to take care of the investment decisions, if they are comfortable taking on this responsibility and what the tax implications are from inheriting and managing these assets.

If they are not as investment savvy as you, kicking off 2018 by building up their knowledge in the world of investing might make the transition for them less daunting and give you peace of mind.

A good place to start is with e-books, education seminars that reputable businesses provide free, and more specialised workshops, such as WIS, which is tailored for baby-boomer women and designed to empower them to feel confident in making financial decisions.

In summary

Markets becoming less volatile and not reacting to global events still means investors should remain cautious. On the surface it might seem OK, but much like a small lump of ice on the ocean, underneath may be an iceberg of risks for investors to navigate around.

About the author

Ishara Rupasinghe is Associate Director at Dixon Advisory, a leading wealth advisor.

From ASX

ASIC's Moneysmart has a range of great SMSF Calculators can help you determine you determine how much retirement savings you will need and how different investment classes have performed over time.

The views, opinions or recommendations of the author in this article are solely those of the author and do not in any way reflect the views, opinions, recommendations, of ASX Limited ABN 98 008 624 691 and its related bodies corporate ("ASX"). ASX makes no representation or warranty with respect to the accuracy, completeness or currency of the content. The content is for educational purposes only and does not constitute financial advice. Independent advice should be obtained from an Australian financial services licensee before making investment decisions. To the extent permitted by law, ASX excludes all liability for any loss or damage arising in any way including by way of negligence.

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