Portfolio chaos: How to sort out a messy investment garden

I am a keen gardener and love having colour and diversity all year round, but because there are plants that hide in summer (the spring flowering bulbs) and others that hide in winter (like my awesome voodoo lilies) it is often a mission to know where everything is and why I put them there – and far too often I used to dig a hole for something new, only to destroy a hibernating bulb. Mercifully, this doesn’t happen anymore since I put a low tech and high tech organizational system in place.

Investments are no different. If you don’t know where all your investments are, the objective of each investment and how they’re doing at least once a year, it’s unrealistic to expect them to flourish. Having said that, just like you don’t have to watch your plants every day, fund changes or portfolio changes don’t have to happen all the time, but only when macroeconomic changes dictate it or there is a significant change in your finances.

Having an ‘objective’ for your different buckets of investment is key. That objective will tell you what asset classes to use, how long the investment is going to run, what portion should be offshore, what tax vehicle is most efficient and what sort of return you can expect. With no objective, it is like buying a plant at a nursery, blindfolded, sticking it anywhere in the garden and hoping it grows into a fabulous strawberry patch – meanwhile it is a slow-growing baobab and is going to be killed off in the first frost.

So, how do you start sorting out your wealth portfolio? First, you need to know what you have and where it is – lucky packets should be left to kid’s parties not investment portfolios. If the investments are with major insurance providers, your advisor should be able to do a database search. The statements of your portfolios should tell you how it has been invested, and if they are unit trusts you can get the latest ‘fund fact sheets’ online from the provider, if that’s too much of a schlep, you should be able to find them at Profile’s FundsData online.

Once you’ve located all your investments and got recent statements and Fund Fact Sheets, you need to get your portfolio organized, preferably on one sheet – and assign an objective to each (retirement, deposit, emergency savings etc). I like to use a simple excel workbook for this, adding a new tab each month, quarter or year (depending on the size of the portfolio, the life-stage of the client and the underlying objectives.) By organising them this way you’ll be able to do your own graphs and keep track on their progress if you have a single advisor ‘on record’ for those investments they will probably do that for you, perhaps with a minimum fund size requirement. If you are adding to, or withdrawing from, an investment on a regular basis the calculation is a little more difficult and requires the calculation of an ‘Internal Rate of Return’ (you can ask the investment platform to do this for you, some will have a calculator on their website to do this, others have to give it to an actuary and it takes up to 2 weeks.)

Warning: There may be penalties if you want to change an investment. Investments on an insurance platform may well have ‘early termination penalties’ – and these can run for decades into the future if the investment is pre-2007, and be up to 30% of the fund. These penalties are created by brokers taking their commission on the investment for the term of the policy (which could be decades into the future) all upfront – on day one. In 2007 these penalties were capped at 15% going forward and 30% retroactively (it used to be up to 100%). Post 2007 the penalties should be on a declining basis but there are still millions of investments stuck in inferior investments with high fees that can’t be moved without severe penalties. The Financial Services Board is looking at enforcing a ‘sunset clause’ because they are in breach of the “Treating Customers Fairly” act – long overdue!

Should you consolidate? If you have a number of investments all with the same objective and they can be moved without penalty, it might be worth your while to look at it. It will be much easier for you, and your advisor, to focus on a handful of investments and not several dozen. You may need to stagger this consolidation over a period of time because of penalties or the Capital Gains Tax implications. There are a number of ways these obstacles can be handled, by way of unit transfer, but advice on that is best left to a professional planner.

“Buy and Hold” is a ‘vintage’ philosophy that can hurt you badly over time. Even Buffett, the king of ‘buy and hold’, sells shares and companies occasionally when they aren’t working. I am not saying that you need to do fund switches every five minutes, but your asset allocation and the fund fees and performance should at least be monitored annually. If your investments aren’t properly structured and been allowed to trundle along for a decade, you’ll never get that time or money back!

You can’t assess your investments properly unless you have realistic expectations on the returns you can get from your different types of investment. Any statement sent to you by an insurer giving you ‘expected maturity value’ should be completely ignored unless it is a guaranteed return. Going back to my ecological analogy, I have recently decided to grow rare coloured Clivias from seed (green, pink etc). I know that it could well be 4 years before these flower, unlike my expectations from my Giant Zinnias which will be flowering in months. Measure returns less inflation (CPI) – in other words the ‘real’ rate of return. It has to be more than zero in order to preserve its purchasing power. Traditionally CPI plus 5% is for equities and property, CPI plus 3 for balanced or blended portfolios and CPI plus 0 or 1 for bonds/cash. For the last 3 years this hasn’t happened. Up to the 15th of June, equities were CPI plus 0% over THREE years. Cash is at CPI plus 3% and bonds as high as CPI plus 5% or more. Property is around CPI plus 1-2%. We Saffers have been used to Equity/Stocks giving us returns of 15, 20, 25% – not flat for 3 years!

Source: biznews