The start of the year is a good time to do a financial health check: review your budget and your savings plan. Wanita Isaacs offers a simple framework for reviewing your investments.

Ask the right questions

Answer the following questions to assess if you are on track to meet your objectives and to check if you need to make any changes:

Are my investments meeting or beating my goals and their own benchmarks over the long term?

It is always best to measure progress against a yardstick, so it helps to start with a clear grasp of the level of return you need to meet your goals. This is your personal investment benchmark and will help you to assess if you should be pleased or disappointed with your return. The unit trusts you are invested in each have their own benchmarks, which represent their goals. Rather than looking at short-term performance, it is important to look at the return a unit trust has delivered over the time frame appropriate to that unit trust, and to your goals.

Have my investments performed as expected?
Investment managers set out the objective and investment strategy of unit trusts in their factsheets. You should assess your performance against your unit trust’s stated mandate. For example, if you are invested in a low risk ‘defensive’ or ‘stable’ unit trust you would not expect to see big swings in performance (down or up). Depending on the objective and strategy, your investments could perform very differently from each other and from the market.

Has anything significant changed at the company (or companies) that I entrust with my investments?
When reviewing your investment, your biggest risk is that you decide to change managers based on short-term performance, switching out of your unit trust at the bottom and into one offered by a different manager at the top of a performance cycle. However, sometimes a unit trust or a management company loses a key person or changes ownership or in some other way changes a driver of their long-term track record. It is a good discipline to check each year whether your money is being looked after in the same way you originally intended.

Are there new opportunities or risks that I hadn’t considered before?
It is impossible to time an investment in the short term but it is useful to consider from time to time whether markets are at a very low or high point and take on a bit more or less risk as a result.

Have my needs changed?
As you encounter life changes – like marriage, children and retirement – you may need to reconsider whether your investments are still appropriate to your changing needs. You may need to save more, change the mix of assets in your portfolio, or start drawing an income.

Interpreting your investment returns

The most convenient way to assess your investments is by looking at percentage growth, but this can be misleading for a number of reasons. As we discussed in the Investment Tutorial last quarter (‘What is outperformance?’ in Quarterly Commentary 3, 2015), this figure often does not account for the amount of risk that your investment manager took on to achieve the return. Risky investments that fluctuate significantly may not suit your temperament and may cause you to switch at the wrong moment.

Return is usually reported as either ‘unannualised’ (also called ‘cumulative’) or an ‘annualised’ percentage. Unannualised return is the percentage by which your investment has changed over a period. Annualised return, on the other hand, states the return as a percentage earned per year over the period. This makes it look as though the same percentage return was delivered every year. In reality, the actual return each year may have been a lot more or less than the reported annualised return.

Annualised return simplifies planning as it is easier to aim for a certain percentage return per year than to aim for an overall total return. However, if you chose an investment that is likely to fluctuate in the short to medium term, your return may be more or less than you need in any year, without this being cause for concern. The compound average over time should concern you more than the actual return in any particular year.

Perform a review once a year

Regularly reviewing your investments is important, but some investors check on their investments too frequently – sometimes daily! This is dangerous behaviour as you may be tempted to make changes in response to short- term performance, which could result in locking in losses. A temporary dip in the markets is only a loss on paper unless you disinvest.

Reviewing once a year is a good rule of thumb. While even a year is too short
a time period to assess a medium to long-term investment, an annual review gives you a good picture of how your investments are performing and allows you to revisit your choices as you go along.

Checklist: How to approach your review

  • Decide on the frequency of the reviews: the more volatile your investments, the less frequently you should review them.
  • Review your long-term investment performance against your personal benchmark. Do your investments measure up?
  • Be clear on your objectives. How have your needs changed and have you been through any major life changes that need to be addressed?
  • Research the market to see if your investments have performed in line with, or better, than market conditions.
  • Read your investment’s factsheet to get insights into what your investment manager has done to achieve returns. Understand the return relative to the unit trust’s objective and the market and make sure the manager’s actions align with the stated investment strategy.