Fisher Investments UK’s Year-End Financial Checklist

If ever there were something to cheer about, we suspect 2020’s end tops the list for many people. In addition to being cause to celebrate, we think it is also a good time to conduct an investment portfolio checkup—something investors benefit from doing periodically. Here, to help, is Fisher Investments UK’s year-end financial to-do list.

Assess whether your financial situation has changed.

Even in a normal year, we have found it is common for someone’s financial circumstances to change—a new job, retirement, new home, marriage, divorce, child going away to university, inheritance—in our experience, all can affect your cash flow needs or investible assets, which can in turn warrant changes to your investment strategy. But in our view, the pandemic raises the likelihood of changes even further. Perhaps you were impacted by permanent or temporary job loss, either for yourself or a family member who needed help. If you own a business, it may have suffered greatly from the lockdowns’ effects on operations.

If you have added to or dipped into your investment portfolio this year, you may find it worthwhile to make some adjustments to bring the amount of equities, fixed interest and other securities you own—known as your asset allocation—in line with your original blueprint. If you find yourself needing to withdraw more cash from your portfolio annually from 2021 onward, this may necessitate a change in asset allocation. The same could be true if you are delaying cash flow needs to replenish your portfolio after taking a needed withdrawal.

Assess whether your investment goals have changed.

In Fisher Investments UK’s view, personal circumstances and cash flow needs aren’t the only things investors should consider when determining an optimal asset allocation. Your time horizon (the length of time your money must be working toward your goals), long-term goals and risk tolerance are key considerations, too. When we talk about goals, we mean the overall purpose for your money, be it to provide for your needs after you retire, leave a legacy for your heirs or a charity, fund a child or grandchild’s college education or something else in that vein. In our experience, it isn’t unusual for a long-term investor’s goals to change along their journey. For instance, if you decide you want to buy a second home in two years, then at least some of your assets likely have a different goal than you set out with. If you or a family member are diagnosed with a terminal illness, that could also have huge ramifications on your goals. Even changing your philosophy on life could trigger a change, if you go from wanting to leave a legacy to enjoying the full fruits of your labour and saving before you pass away. We can see scenarios where the stress and trauma of this year affects how you plan to spend your retirement years. All that is relevant to your investment goals, in Fisher Investments UK’s view.

Assess whether your portfolio’s returns are far out of step with the broader market.

 More concretely, we think checking in on your portfolio’s performance periodically is always wise. Not because you should always be making changes to chase returns, but rather, because if your performance is wildly different from the broader market, it could be a sign you are taking too much risk. Note, that holds even if you do much, much better than a broad index like the FTSE All-Share, Stoxx Europe 600 or, if you are invested globally (which we think is most beneficial), the MSCI World Index. If you beat whichever index best resembles the universe of securities you are choosing from by a wide margin, it could very well indicate you aren’t sufficiently diversified. Which brings us to …

Assess whether your exposure to individual companies, sectors or geographic regions is too high.

In addition to being a measuring stick for your performance, we think a broad index like the MSCI World Index is a good blueprint to assess your portfolio’s construction against. At MSCI’s website, you can find factsheets that show the index’s sector composition, which you can then measure your own sector and country concentrations against to see if you are taking excess risk. (Many banks will show your sector allocation on your statements, and you may also be able to find it when you log in to your account online, depending on your bank’s website.) For example, the MSCI World Index factsheet dated 30 November 30 2020 puts Information Technology at 21.6% of the index’s market capitalisation (meaning, the market value of all constituent companies).ⁱ Therefore, if half of your portfolio value is in Tech, in Fisher Investments UK’s view that is probably too much. Even if you expect Tech to continue doing excellently, we think it is important to be diversified in case your expectations prove incorrect.

The same applies to individual companies, in our view. Unless you are dealing with the biggest companies in the index, we think it is best to limit your exposure to any one company to around 5% of your total portfolio value at most. That reduces the risk that unforeseen troubles at a single company can cause huge problems for you financially. In our view, it is important not to overlook any holdings of the company you work for, if you work for a publicly traded company and own shares in it. In Fisher Investments UK’s experience, many investors hold high concentrations of their own company’s shares. Whilst that might seem logical, since many reason that their employment means they know their own company inside and out, it doubles the influence that company has on your financial situation (salary plus retirement investments). Diversification is a key insurance policy, in our view.

These considerations can form the foundation of a quality yearend portfolio checkup—a step we think can help you enjoy a happier, brighter and financially healthy 2021.

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