Shake off the dust and shine new light on your portfolio

Equity allocations in Europe are at their third-highest level on record, and while US stocks are expensive, they continue to outperform European ones.

Bob Quinn, principal of The Money Advisers, warns against fads. “By the time the media latches on to the next big thing, all the goodness has been stripped out of it,” he said. “If someone is offering you something that appears to be too good to be true, then it probably is.”

Know when to fold them
We have “a habit in this country of holding on to the duds longer than we should”, said Quinn. “If an asset or investment is not performing, and stands little chance of performing, there’s no point in retaining it.”

He added that if you offload a badly performing investment, you can offset losses against shares that are subject to capital gains tax (CGT).

“If you bought AIB shares 10 years ago, they’re now virtually worthless,” he said. “If you bought CRH shares at the same time, they have performed well, so you have a capital gain. You might look at offloading the AIB at a significant loss, but it could substantially offset your CGT,” said Quinn.

You should only do this if you believe your “dud share has little prospect of recovering”, he added. “It’s the Kenny Rogers line: ‘You’ve got to know when to hold ’em, know when to fold ’em’.”

Rory Gillen, founder of Gillen Markets, said investors should not confuse volatility in the market with underperforming funds. Investors should take a long-term view. “Don’t plan to take out your money before 10 years, or at least five years,” he said. “If you are planning on taking it out, don’t bother investing.”

Re-evaluate your risk profile
Finding out what risk you can tolerate is crucial, according to financial advisers. You may have completed risk questionnaires in the past, but your risk profile will change. A person nearing retirement age may not be able to take on as much risk as a younger person, for example, and could be less flexible in their approach to their investment strategy.

Gillen said your risk profile should depend on the stage you are at in life. “If you are 25 years of age, your investment should be in all equities or all property so you can take the time to overcome any downturn,” he said. “If you are aged 55 or 70, you want to equalise your risk. By doing that you have to accept lower returns.”

If your retirement is two or three years down the line, consider switching to a safer fund, said Rubin. “Switch to a six-month review to keep a closer eye on it,” he added.

Depending on your risk profile, you could divide your assets into guaranteed income-type investments and another for more aggressive, long-term investments. If you want an income stream, Rubin suggests moving from equity-based funds to bond-based funds, which pay periodic dividends and realise capital appreciation.

Eoin McGee, principal of Prosperous Financial, said investors need to be aware of how their personal circumstances have changed within the past year.

“Do yo need to be chasing more return or less return?”

There are online questionnaires that you can take to find out your risk profile, but Rubin warned against placing too much focus on these. “Talk to an adviser as (surveys) don’t take personal circumstances into consideration,” she said.

Diversify
Last month Merrill Lynch’s fund manager survey found Europe and emerging markets shares represent better value.

Rather than going with the flow of fund managers — or putting all your eggs in the Irish stock market, which represents less than 0.5% of the world’s stock markets — investors should look at global diversification, according to Gillen. “The know-nothing investor should realise they know nothing and gravitate towards globally diversified funds,” he said.

Quinn warned of home bias from investment managers. “On the global equity market, Ireland doesn’t even represent 1% of the market. If you have 80% of your net worth invested in Irish equities, and the Irish economy hits the rocks a week before you retire, you’re scuppered.”

Rebalance your portfolio
In your spring clean you should examine if you are overexposed to a particular investment. “Some people find that they are overexposed to property, for example,” said Rubin.

“They have a large personal property portfolio and also invest their pensions in property funds.”

Gillen and McGee said investors should be vigilant about the way their funds are being invested.

“You may have designed a portfolio around your risk profile and put 50% in shares and 50% in bonds,” said McGee. “If the shares did well for you, you could now be sitting with 75% in shares and 25% in bonds,” he said.

Manage your fees
A spring clean should involve a comparison of how your charges compare with the rest of the market. “The longer you are holding investments the more likely it is that you are paying above the average 1%-1.5%,” said McGee.

The fees attached to some funds are much lower than 1%. The expense ratio of Vanguard, one of the world’s largest investment companies, at the end of April stood at 0.14%, for example.

In Ireland, regulation requires investment managers to declare the annual management charge only. In European and UK markets, investors are entitled to know the total expense ratio, which measures the total costs associated with managing and operating the fund.

Get advice
Financial advisers tend to know more about investment funds than retail investors, so are worth a call.

“Find the adviser who will work for you, not for an insurance company,” said Quinn. “They should act as your financial advocate, and make sure the decisions you make are in your best interests.”

He added: “Don’t go to an adviser who talks about the best returns. Go to an adviser who will help you and understand your objectives.”