Yearly Investment Review: A Step-by-Step Guide

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If there’s one thing the pandemic years have taught us, it’s the importance of checking in. Checking in on your friends, checking in on your family, and even checking in on yourself. Interestingly, your investments aren’t very different. You need to periodically check in on them too - and review how they’re doing.

How often should you review your investments?

Ideally, you need to review your portfolio and see how your investments are performing every six months or every year. Investors generally rely on annual portfolio reviews simply because it’s easier to stick to an annual schedule. And for some investments - particularly the long-term ones - checking in every six months may not be practical.

So, for all intents and purposes, an annual investment portfolio review seems to be the best course of action. But to get into the finer details, what exactly should you be reviewing? And how do you go about doing that? Our step-by-step guide on this can help you with the answers you’re looking for.

A step-by-step guide to help you with your annual investment review

Having a plan of action can make it easier for you to review your investment portfolio efficiently. Typically, your investment review comes with three key objectives attached.

  1. To maximize returns
  2. To minimize costs and risks
  3. To achieve your life goals

The steps we’re going to see now all aim to fulfill one or more of these objectives. Let’s get started and see how you can efficiently review your investment portfolio every year.

Step 1: Review your life goals

Your investments have one main purpose - to help you achieve your life goals. So, each year, take the time to first revisit your life goals. In the span of one year, you may have already achieved some of the things you planned last year. Or, you may have new goals on the list. Review the goals that you have accomplished, and add new ones to your list if you need to.This gives your investments a sense of purpose.

For instance, last year, you may have added a new goal - to buy a premium laptop for working from home. Now, 12 months later, you may have checked off that goal. Instead, you may have other things to add, like saving up for a new car, or increasing the amount you invest in your retirement fund. Make sure to update your list of life goals - both long-term and short-term. Defining your goals makes it easier to make changes to your investment portfolio, if needed.

Step 2: Review your risk appetite

Your investments also need to be in tune with your risk profile. If you are younger and open to taking on a higher degree of risk, it makes little sense if you restrict your investments to debt instruments alone. Conversely, if you are a more conservative investor, your ideal portfolio may not have a very large exposure to equity or other market-linked investments.

Similarly, risk appetites may also change with time. For instance, say you have been a risk-aggressive investor for the past 5 years. In that case, you may have invested in many high-risk options, like equity or even cryptocurrency. This year, say you wish to reduce the risk in your portfolio. You will then need to review your investments and reduce exposure to high-risk assets or options. Instead, you will need to replace them with stabler investments like debt instruments or balanced funds.

Step 3: Review your asset allocation

Asset allocation refers to the manner in which your capital is distributed across - or allocated to - different asset classes. Over the course of one year, the original asset allocation you had in place will certainly vary, because the value of your investments could increase or decrease. Let’s take up the case of a simple portfolio to understand this better.

  • Say you have Rs. 10,000, and you originally invest in equity and debt in a ratio of 1:1.
  • That means you invest Rs. 5,000 in equity and Rs. 5,000 in debt.
  • After one year, say equity has performed extremely well.
  • Now, your equity investments have grown to Rs. 9,000, while your debt investments are at Rs. 7,000.
  • In this case, your new asset allocation across equity and debt would be in the ratio of 9:7

When you perform your annual investment review, you need to bring the asset allocation back to the original ratio of 1:1. So, you need to divest Rs. 1,000 from equity and reinvest it in debt, bringing the total investment in each category to Rs. 8,000 - and the ratio to 1:1 again.

Keep in mind that the original asset allocation will remain valid only if your risk appetite remains the same. In case your risk appetite changes, you will need to adopt an asset allocation that is more in tune with your new risk tolerance.

Step 4: Review the level of diversification

Asset allocation is important. And so is portfolio diversification. You may have allocated your capital optimally, but if your portfolio only includes a couple of investments, it is not adequately diversified. If those investments do not perform well, you could risk losing most or all of your capital. So, it’s important to spread your investments across various assets and asset classes.

However, take care not to diversify too much, because that would just dilute your gains. The trick is to diversify smartly. For instance, you could diversify within equity as an asset class by including stocks from various sectors, or stocks of different market caps. You could also then supplement this with some debt and money market instruments for greater stability.

Step 5: Review the tax efficiency of your investments

Your investments also need to be tax-efficient. This helps ensure that your net returns don’t shrink too much. After all, even if an asset gives you market-beating returns, it boils down to much less if the returns are taxed heavily. So, check for tax benefits1 on your investments, and make sure to take advantage of the provisions in place.

Also, before you invest in an asset, review the net returns if offers after taxes. Compare the rate of net returns across different investment options and choose the most tax-efficient instruments or schemes. The end goal, after all, is to maximize returns and minimize the costs, right?

Step 6: Review the fees and charges

Some investments also come with additional fees and charges. Others may have introduced new fees in the period since your last investment review. Do a little bit of research and check for any new charges you may not have accounted for. If the overall cost of investing seems to be eating into your returns greatly, you may need to look for other investment options that help you achieve the same goals as the old one.

Also, some new investments that are more cost-effective may have been introduced in the interim. If these schemes or assets can help you meet the same goals as costlier options, you could consider investing in the former category, since your overall returns will be maximized.

Bonus tip: Check if your family is financially well-protected

There’s another important thing you need to do before you wrap up your annual investment review. And that is to check if your family is adequately protected in case of any eventualities. The best financial product to put in place this kind of protection is life insurance. As a part of your annual review, make sure you revisit the insurance coverage you have and check if it is enough to cover the following.

  • Your family’s everyday expenses
  • The costs of your family’s long-term life goals
  • Any loans and liabilities in your name

You may also need to enhance the coverage you have with another kind of life insurance plan, if necessary. For instance, you may have purchased term insurance in your 20s. And then around a decade later, you may be married and have children. In this case, you may want to supplement your term plan with another kind of life insurance plan like a savings plan or a ULIP.

Savings plans like the ABSLI Guaranteed Milestone Plan can help you save up for life’s key milestones, while ULIPs like the ABSLI Wealth Assure Plus can aid in your wealth creation journey. Both these goals become more important as your family grows.

Last words

Now that you know how to perform your yearly investment review, you only need to pick a date and stick to the schedule. It’s best if you set a reminder each year, so you can perform your review without fail, like clockwork. And in case you are unsure of what changes you need to make in your portfolio, if at all, you could always seek professional help.

1 Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.

ABSLI Guaranteed Milestone Plan (UIN: 109N106V09) is a non-participating traditional insurance plan.

ABSLI Wealth Assure Plus (UIN: 109L120V02) is a non-participating unit linked life insurance plan. ADV/8/21-22/758

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