Getting it right in 2020 - An investor checklist for the new year

By Sue Dahn - December 19, 2019

It’s a good time to see how your investments measure up. The weeks ahead offer a decent time for a summer review of your investment portfolios — preferably with a clear head after all those holiday festivities. If you make the effort you can start the new year in good shape.

This article originally appeared in The Australian on 14 December 2019

Here are the basic elements you could include in that review:

Review your risk tolerance

Another year has passed and you’re now a year older and closer to retirement (or deeper into your retirement), your life circumstances may have changed in other ways and it may be that your tolerance to risk has changed. The financial markets have just delivered a record year of returns (20 per cent on the sharemarket). But as always there is plenty of uncertainty on the horizon for next year and there may be good reasons to reduce exposure to riskier assets. On the other hand, your wealth may have increased materially during the year, say by way of a significant realised asset or a bequest, and you may wish to increase your risk tolerance because you now can.

The key question: ask yourself “would I feel as bad or worse than I did last year if the market had a serious downwards correction now?”

Assess your asset allocation

If your risk tolerance has fallen, consider substituting risk in the sharemarket for some defensive alternatives. If your risk tolerance has increased, perhaps consider deploying excess cash into growth alternatives such as property, infrastructure and private equity. If you are an advised investor, schedule a discussion on this key topic with your adviser.

Rebalance portfolios

Portfolios inevitably drift through performance, dividend reinvestment, initial public offers, capital raisings, buybacks, takeovers, etc. Generate a report to establish how far away your actual allocation is from your original target allocation. If you don’t have such a report, work it out manually. And make sure assets are correctly categorised. I am increasingly seeing credit investments characterised as defensive fixed interest, for example, when most credit assets are actually positively correlated to sharemarkets.

Concentration risk

Put simply, concentration risk is the “too many eggs in one basket” risk and can occur with asset classes, geographies, currencies, business sizes, business sectors, individual shares, funds and fund managers.

Most Australian investors are overexposed to Australian assets and the Australian currency, but so-called investor home bias is not necessarily a bad thing when it matches the location of future liabilities and currency of future cash flow needs.

In the same manner, review the diversification of business size and sector in the portfolio and consider whether it meets with your investment intentions.

For example, some equity investors can inadvertently hold way too much or way too little in small cap exposures — stick to the 80/20 rule. I’ve heard hilarious proclamations from investors — “Oh I am very diversified: I hold all four major banks!” Review any individual holdings over more than 5 per cent of your total portfolio and consider re-sizing. Review exposure to any active fund managers over 10 per cent of your portfolio. Review the most recent reports of fund managers — are you inadvertently doubling or tripling up on underlying holdings?

Review structures

The great enemies of the investor are unnecessary taxes and fees. Are your growth assets held in legal structures that enjoy the lowest available tax rates on realised capital gains? Are your income-generating assets held in legal structures that enjoy the lowest available tax rates on income?

If you are an investor who works closely with an adviser, this is a critical aspect of discussions, or you might wish to consult your accountant.

Similarly, are you in the lowest-cost version of any managed investment products — wholesale rather than retail, exchange traded fund rather than unitised managed fund? Do you know what you are paying? Also, are you getting value for money for any advisory, monitoring, management, administration and reporting fees paid to an adviser or advisory group?

Assess your liquidity

How much of your portfolio could be liquidated into cash in three days or seven days? Do any of your investments have gates or waiting periods to exit, or are completely locked up until a set termination date? You might do this to make sure your portfolios are liquid enough in the event of an emergency or need for funds.

Cash option

Yes, interest rates are historically low, but are you holding enough? Are you earning a reasonable (it’s all relative!) interest rate on your cash holdings? A good idea at this time is to consider alternatives to traditional term deposits such as 12-month annuities.

Optimising super

It pays to periodically check that your super guarantee withholdings (if applicable) are getting through to your designated super accounts.

Now that another year has passed, also review whether you are in a position to turn on the most concessionally taxed “pension mode”.

And for fortunate high-balance holders/high-income earners, you can work around the surcharges that come with exceeding your $25,000 annual concessional contributions by requesting that one or more of your employers are released from the requirement to pay your super guarantee.

Sounds like a lot of housekeeping, but trust me, it’s worth the effort.

The views expressed in this podcast are provided by Pitcher Partners Investment Services and do not represent the views of any other Pitcher Partners financial services licencees.
Pitcher Partners is an association of independent firms. The advice provided to you is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. Accordingly, before acting on the advice, you should consider the appropriateness of the advice having regard to your objectives, financial situation or needs. If you wish to acquire a financial product, we recommend you seek advice from a Pitcher Partners Investment Services’ representative, and where applicable, consider the relevant offer document prior to making any financial decision.
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