Tips to take stock of your investments

Wanita Isaacs, head of investor education at Allan Gray.

When last did you perform a financial health check by reviewing your investments? It’s important to occasionally take stock to assess whether or not you are on track to reach your goals.

“Generally, assessing your investments 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,” says Wanita Isaacs, head of investor education at Allan Gray.

She says that you should not be tempted to perform investment reviews too often, as you may make changes to your portfolio based on short-term performance, which could result in locking-in losses.

Isaacs offers top tips to perform an investment health check.

1. Check your investment performance against your personal benchmark

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.

2. Review your objectives

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.

3. Assess your investment performance against the market

While it is impossible to time an investment in the short term, it is useful to consider whether markets are at a very low or high point and make your decisions accordingly. When reviewing your investment, your biggest risk is that you base your decisions on short-term performance and switch out of your unit trust at the wrong time, locking in losses, or you overspend on a unit trust at the top of its performance cycle.

4. Review your unit trust’s performance

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. Depending on the objective and strategy, your investments could perform very differently from each other and from the market.

5. Understand how to interpret your investment returns

The most convenient way to assess your investments is by looking at percentage growth, but this can be misleading. 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’ or ‘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. The compound average over time should concern you more than the actual return in any particular year.

If you are uncomfortable interpreting the investment returns, or performing an investment review, a financial adviser can help you through the process.