What exactly do we understand by a portfolio health check? Remember, your financial plan is not static because your life situations are not static. As you age your risk appetite reduces and the need to create wealth becomes more urgent. Then there are macro economic factors like higher inflation, higher interest rates which can actually make a mess of the best of financial plans. Also your income trajectory or your expenditure trajectory could change drastically necessitating changes to your original plan and to your original assumptions. That is what your portfolio health check is all about! It evaluates whether your financial plan and your investment mix is still in tune with your long term goals. More importantly, does it reflect the changed reality?
The more practical question is how to monitor your investment portfolio? Obviously, there are online tools and formulas to see if your portfolio requires a special health check. But you also need to understand the use of portfolio monitoring tools like trackers which can give you a very elegant “what if” analysis and give you sensitivities. Lastly, you come to the question of how often should you check your portfolio? There are no hard and fast rules, but ideally an annual health check is a must. That can be a routine check but you also need to understand the triggers that can call for a portfolio health check..
1. Ideally take a relook at your complete financial plan once a year
There are differing perspectives on the frequency of your portfolio health check. However, when you are talking about long term goals, an annual check up should be good enough. Too frequent check-ups may not yield anything concrete as long as your long term goals are in line. Also do not delay your portfolio check to beyond a year as you may miss out on the opportunities to make required shifts in your strategy. The routine check will entail ensuring that your investment mix is in sync, your insurance coverage is adequate, your portfolio mix has not got skewed etc. We now move to the other non-routine triggers for portfolio health check.
2. Take a re-look when certain asset classes have outperformed
There are occasions when you will find that certain asset classes have grossly outperformed or underperformed. Take the case of equities in the last 2 years. They have given an average CAGR return of 22% and that means the share of equities in your overall portfolio would have gone above the comfort level. A portfolio health check is called for to ensure that your financial plan is not entirely out of sync with your long term goals. Similarly, if rates have fallen then your debt portfolio may have outperformed making a case for realigning and adding more of equity into your portfolio.
3. Take a portfolio health check when there are major changes in your life
What do we mean by major changes? Let us say you have a new member in your family or your parents are now going to be dependent on you. One of your family members may have a chronic health problem that may require continuous treatment. Alternatively, you may have either shifted to a new job or may have embarked on an entrepreneurial journey. All these call for a bottom-up relook at your financial plan and it may call for you to be a little more practical and temper your goals.
4. Do a portfolio health check when your risk appetite changes
There are different triggers for a shift in risk appetite. Your risk appetite gradually reduces as your age advances. If you use some of your intermittent cash flows to increase your insurance cover or to repay some of your loans then that adds to your risk appetite. You may be 45 but you may realize that because you have smartly used your funds to repay all your debt you can actually afford to take on more risk in search of higher returns in the future. This again calls for a complete portfolio health check and necessary changes to your asset mix.
5. When some of your goals require a second look
You may have projected your child’s college costs assuming current costs adjusted for inflation. But the costs may have gone up sharply due to a sharp strengthening of the US dollar versus the Indian rupee. Alternatively, you may have assumed an inflation rate of 5% and the actual inflation may have been just about 3%. That means you are going to overshoot on most of your targets which is a good problem to have. You need to see if you can afford to become a little more aggressive on your goals. This again calls for a portfolio health check.
6. When there is a need to rebalance ahead of milestones
A very important of your financial plan is to evaluate it as you reach various milestones. You could require funds for home loan margin 3 years from now, for your child’s education 15 years from now and for your retirement 30 years from now. Obviously, you do not want any nasty surprises when you reach your milestone due to unfavourable movements in asset classes. So as your approach your milestone you reduce the risk. So if you are accumulating wealth for a 20 year target then by the end of the 18th year you should reduce the risk component of assets and closer to the target date you must be as close to liquid as possible.
The moral of the story is that your needs are dynamic and therefore your portfolio plan should also be dynamic. The more flexible you are, the more likely that your portfolio will reflective of reality!