Is now the perfect time to give your portfolio a mid-flight check?

Fixing the roof is easier, and more enjoyable, when the sun is shining. What a shame then that we only tend to look critically at our investments when it’s blowing a hooley in the markets and we are scrabbling around for buckets to catch the drips.

A year into the most remarkable recovery for stock markets that we are ever likely to experience, now is the perfect time to give our portfolios a mid-flight check. When, not if, you hit the inevitable turbulence ahead, you’ll be glad you did. Here are ten questions to ask.

  • If we do hit an air pocket, will you have to sell at what may be a temporary low? Remember that after a similar recovery in 2009, the market fell 17pc in the summer of 2010. It happens. If you are still earning, the answer is probably no. If you are, however, taking an income from your investments, make sure that you have at least six months’, and preferably a couple of years’ expenses set aside in cash. Don’t be a forced seller.

  • Are you really diversified? It’s easy to think that because you have a blend of shares and bonds in your portfolio you will enjoy a smoother ride. Maybe that was once true. These days, these two assets move in lock step a lot more than they used to. If interest rates start to rise on inflation fears, shares and bonds could both fall at the same time. You should put your eggs in a few more baskets. Infrastructure, inflation-linked bonds, property, commodities could all have a part to play.

  • What are your rules for selling? You probably don’t have any, which is a shame because a crisis is a bad time to be trying to think straight. Some people employ stop losses, which can staunch the bleeding but risk turning a temporary loss into a permanent one. A better approach is to write down why you made an investment in the first place and ask yourself after a fall whether anything, other than the price, has changed.

  • What is the balance between income and capital gains in your expected returns? People tend to think of dividends as a nice to have, the icing on the cake. The reality is that income is a major contributor to total returns over time because dividends are usually more stable than prices. After last year’s widespread dividend cuts, the outlook for income has improved significantly. Some traditional sources of yield (miners, energy, utilities) currently offer high and sustainable pay-outs with the likelihood of inflation-busting growth to come.

  • Do you have any dry powder to put to work when markets become more volatile, as they certainly will? Having some cash to hand (separate from what you’ve put aside to cover expenses) is essential if you are to benefit from Mr Market’s mood swings. If you were fully invested in March 2020 you would have enjoyed the subsequent recovery but how much better if you could have added to your investments at bargain basement prices.

  • Do you suffer from confirmation bias? We all tend to be temperamentally inclined towards over-optimism or excessive pessimism. It is generally better to err on the side of positivity when it comes to investing because markets go up over time. But you might still ask yourself what could go wrong. If you are naturally gloomy, you will, like a stopped clock, be right from time to time. But the history of stock markets has rightly been described as the Triumph of the Optimists. Seek out opposing views.

  • Are you becoming more optimistic as the market rises? Watch this tendency because the best returns have been achieved by investors who adopt the opposite approach. My former colleague Anthony Bolton used to advise younger fund managers to become more bullish as the market fell. Easy to say and very difficult to do. The growing appetite for risk-taking in obscure and volatile assets like cryptocurrencies suggests people are chasing growth. That’s worrying.

  • What is your buy discipline? The flip side of the rules for selling. The evidence is clear that the higher the price you pay for an investment the lower the likely returns. This may not be true in the short term because valuation is a poor guide to performance in the short run. But in the long run it is the key variable. Sometimes cheap gets cheaper but paying attention to valuation will stack the odds in your favour over the long haul.

  • Are you an emotional investor? This is a silly question. Of course you are; you are a human being. This means you should do everything you can to take the feelings out of your portfolio management. The best way to do this, if you are still putting money into the market, is to do it regularly and systematically. It makes you invest when you don’t want to – invariably the best time to do so.

  • And, finally, how well do you know yourself? Twelve years into a bull market, it is tempting to think that we have a greater tolerance for risk than we actually do. You will find out what your real risk appetite is when your portfolio is worth 30pc less than it is today. To benefit from the stock market’s great gift, you have to accept its unavoidable ups and downs. But you also need to be realistic about what you can, and cannot, live with.

As ever, the last word is best left to Warren Buffett. ‘Rule number one: never lose money. Rule number two: never forget rule number one’.

Tom Stevenson is an investment director at Fidelity International. The views are his own. He tweets at @tomstevenson63.

If you have any questions regarding investing in the shorter or longer-term, call us on 03 9038 9449.

Source: Fidelity May 2021
Reproduced with permission of Fidelity Australia. This article was originally published at

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