Reviewing your investment portfolio on a regular, at least annual, basis is essential.

In the current economic climate it becomes even more important to conduct a regular and thorough review of your holdings. This needs to be done in the wider context of your overall financial planning, as a stand-alone review of funds can often neglect other considerations.

Here are the five main areas to consider the next time you review your investment portfolio. The same factors apply equally to a review of your pension portfolio.

1 – How much risk are you taking with your money?

When you are investing money, you need to take risk in order to stand a chance of receiving a reward. This is a fundamental principle of investing money. Of course the degree of risk you take is down to you. Any investment portfolio can be structured to have a very cautious or very adventurous risk profile, or anywhere in-between.

When we engage with new clients and review their existing investment portfolios, we often find a complete mismatch between the amount of risk they are taking with their money and their personal investment risk profile. Sadly it is often the case that they are taking much more risk than they should be taking.

Understanding the investment risk profile of a portfolio is not simple and may require the services of a professional adviser. However, you can get a reasonable feel for how much risk you are taking by understanding the proportion of your portfolio held in safer assets such as cash or fixed interest compared to more risky assets such as equities or property.

2 – What is your long-term asset allocation strategy?

Every investment decision you make is an asset allocation decision. There are four main asset classes available to any investor – cash, fixed interest, equities and property. The amount you allocate to each of these asset classes will have the biggest impact on the long-term returns generated by your investment portfolio.

Many investors make their investment decisions at fund or stock level, without consciously thinking about an asset allocation strategy. This can be costly because returns from fund or stock selection tend to account for only tiny proportion of overall investment portfolio returns. It is getting your asset allocation right that makes the biggest difference between success and failure.

There is another very good reason for having a long-term asset allocation strategy. When markets are turbulent, as they have been recently, having a documented asset allocation strategy will enable you to remove some of the emotion from your investment decisions. It allows you to make logical moves that are not dictated by what the markets are doing at that particular time.

3 – Which fund managers should you sack and replace?

Whilst asset allocation is the most important factor, we believe it is also possible to add value through a process driven selection of fund managers.

When you review your investment portfolio to decide on the ongoing suitability of individual funds, you need to consider more than past performance. There might be good reason why a particular fund has delivered the returns it has over the past year. Looking beyond past performance figures is an essential step in reviewing your portfolio because this should prevent you from switching out of funds at the wrong time.

However, if a fund is consistently underperforming compared to alternative options, do not be afraid to sack and replace it. Most modern fund supermarket platforms make very modest charges for switching between funds. A switching charge of 0.25% of the amount switched is typical, and time out of the market whilst the switch is taking place is minimal. Within many pension and Investment Bond policies there are no charges for switching between funds.

Of course you always need to think about the tax consequences of a fund switch. Also, avoiding poor performance as a reason to switch out of funds means not using good past performance as a reason to switch into funds! Consider a whole variety of quantitative and qualitative factors including risk-adjusted returns, volatility and charges.

Five questions to ask before you invest in a fund

4 – Where are the charges going?

It costs money to invest your money. There are typically two types of fund management charges – an initial charge when you invest the money and then an annual management charge deducted each year. Some funds also have an exit charge for when you sell your holdings.

In the case of both initial and annual charges, these are often partially charged to pay commissions to a financial adviser. A typical charging structure for a collective investment fund might be a 4% initial charge and a 1.5% annual management charge. Of these, 3% commission might be paid to the financial adviser when you make the investment and then 0.5% commission is paid each and every year.

Sadly, in some instances investors continue to pay higher charges without getting a defined ongoing service from the financial adviser who recommended the investment.

Take a careful look at the charges you are paying on your investment and understand where the money is going. If you are not getting a good level of ongoing service from your financial adviser but you are continuing to pay them out of fund management charges, sack them and replace them with an adviser who will deliver good service.

5 – How should you measure future performance?

In a rising market, there is a fair chance that your fund might also go up in value. When investment markets fall, funds are likely to fall as well. The measure of success or failure in either of these situations tends to be the success of your fund relative to the performance of a given market or sector. This ‘relative’ performance differences from ‘absolute’ performance as it also includes situations where your investment loses money.

What is important is to establish a benchmark to measure the success of your investment portfolio in the future. Your benchmark might be ‘absolute’ (such as a 5% return each year, or a certain percentage above the interest rate available from cash) or ‘relative’ (such as the average of a particular investment sector or market index).

Having a benchmark in place allows you to carry out a meaningful review of your investment portfolio rather than simply looking at a performance figure in isolation. Set your benchmark at the outset when you invest money and then use it each and every year to track the success (or otherwise) of your investment strategy.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

Each ‘focus on’ examines the objective of the fund, an analysis of recent performance, the manager, charges and other factors.

Within this ‘focus on’ we take a closer look at the Schroder Tokyo fund. This fund sits within the Japan Equities asset class.

Fund objective

This fund aims to achieve long-term capital growth through participation in the growth of the Japanese economy.

It invests primarily in the strengths of the Japanese economy, such as its manufacturing industry (and in particular on those parts of the manufacturing sector that have the ability to exploit newly emerging technology). The fund also invests in sectors benefiting from structural change in the economy.

This fund invests in directly held transferable securities but can also invest in collective investment schemes, warrants and money market instruments.

Track record

This is a second quartile fund over one and five years, with first quartile performance over three years.

For the year to date it has returned 15.33% compared to a sector average return of 10.63%. This places it 32nd out of 111 funds in the IMA sector.

This fund has a strong and consistent long-term performance record, demonstrating first or second quartile performance in discrete annual periods back to 2006/07. In the previous two discrete annual periods it delivered fourth quartile performance, but with reasonably small underperformance of the sector average returns in absolute terms.

The managers

This fund has been managed by Andrew Rose for the past five and a half years. He is well suited to understand the particulars of Japanese investment, as he holds a degree in Japanese and Politics.

Rose began his investment career in 1981 when joining Schroders. He moved to Toyko in 1984 before returning to London in the late 80’s to take responsibility for Japanese equity investments for UK and European clients. He went back to Japan for a spell in the 90’s and returned to the UK in 1999 as Joint Head of the Japanese Equity Team.

Rose remains based in London but has the support of a well resourced team on the ground locally in Japan, including four fund managers and twelve analysts.

Style

This is a large-cap orientated Japanese equity fund with a flexible and undogmatic investment style. The manager has a preference for investing in established, profitable companies with attractive valuations relative to the market.

The team has adopted a bottom-up investment approach based on proprietary research. It is worth noting that the manager has a lot of freedom in running this fund. He is able to take significant stock positions.

Charges

The fund has a 5.25% initial charge and a 1.5% annual management charge, with a total expense ratio (TER) of 1.67%.

For the BrilliantWithMoney SIPP, this initial charge is discounted to nil and the annual management charge is discounted to 0.75%.

Conclusion

This is a well established Japanese equity fund, seemingly overlooked by some of the fund ratings agencies. The performance track record appears to be improving in more recent years. Whilst the manager takes some quite bold positions, in the main this fund is well diversified and internal risk controls should ensure that exposure to medium or small-cap stocks do not lead to excessive risks.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.

The small but important print: This article was produced for information only and should not be considered a recommendation to buy, sell or hold a particular investment fund. Seek advice from a professional independent financial adviser before making a decision. The performance data in this article was provided by Financial Express and was correct as at 4th October 2009.

We think that there are five common mistakes made by investors. These are the Cardinal Sins you need to avoid when investing your money. Understand these common mistakes and you stand a much better chance of being an investment winner.

1 – You pick funds or stocks based on their past performance

You will probably be familiar with the investment risk warning which explains that past performance is not necessarily a guide to the future. It is quoted by fund managers and investment advisers for a very good reason – it is true!

If you make your investment decisions based on past performance alone, you are likely to be very disappointed. Past performance is a great guide to where an investment has been but a lousy indicator of where it is likely to go next.

We often see ‘performance chasing’ where people invest near the top of an investment market, having just watched it shoot up in value. More often than not there is only one direction left for the investment to go, and it isn’t up!

Various studies have shown past performance to be an unreliable indicator of future performance. Others have demonstrated that funds which have outperformed a benchmark in the past are actually less likely to do well in the future.

2 – You try to ‘time’ the markets

If you believe that you can accurately and consistently pick the most appropriate time to invest your money, you are probably delusional. It can be tempting to delay making an investment, particularly when an investment market is volatile. The last thing you would want to do is invest today only to find out the market was cheaper tomorrow or next week.

The problem with trying to time your investments is it is too easy to miss out on the gains. The best stockmarket gains tend to happen very quickly, just as the most severe stockmarket falls are often concentrated in a relatively short period of time. Trying to time the markets can therefore result in you missing out on any fast recovery.

The best study looking at this was conducted by Fidelity. They looked at UK, US and other stockmarket performance between 1994 and 2009. They found that by simply missing a few of the best days of performance the overall result could be substantially different. Over the fifteen year period in the FTSE All Share Index, missing out on the ten best performing days would have resulted in a portfolio worth 46% less than one fully invested throughout the period.

The golden rule for investment is that it is ‘time in’ the markets that counts, not ‘timing’.

3 – You invest in things you do not understand

Investing money should be simple. At the most basic level, you have a choice between cash, fixed interest securities, company shares (equities) and property. The more risk you decide to take with your money, the better chance you have of higher returns.

Many investors try to overcomplicate things. They look for exotic investment ‘opportunities’ with the hope of breaking the unbreakable link between risk and reward. They are attracted by the prospect of double digit annual returns with seemingly no danger to their capital.

You should only ever invest in things you understand. Always apply the ‘ten minute bin test’ to your investment decisions. If you cannot fully understand an investment prospectus after ten minutes of reading, throw it in the bin and walk away.

The most effective investment portfolios are often the simplest ones. There is no need to chase complex investments when you have so much choice from the conventional range of investment asset classes. KISS – Keep It Simple (Stupid).

4 – You have too much diversification in your portfolio

Whilst you should never keep all of your financial eggs in one basket, there is also a danger that you can become too diversified when investing your money.

The idea of a diversified investment portfolio is to invest in ‘negatively correlated’ investment assets. This means that when one investment moves down, the others should move up, and vice versa. The impact of this negative correlation within an investment portfolio is what reduces the overall level of risk in a well diversified basket of investments.

As with anything in life, you can take this concept too far. More and more diversification with your investments will drive up costs, diminish the prospects for returns and make the business of managing your investments incredibly stressful.

5 – You never review your investments

Whilst there is a good argument for keeping your money invested for as long as possible, a regular review is also important. Things change over time when you invest money. These things include the overall asset allocation of your portfolio which can result in you taking more or less risk than you should be. Asset allocation changes occur naturally when different investment asset classes perform differently over time.

A regular review of your investments is also a good opportunity to identify and replace underperforming funds. Even with the best fund selection process in the world, it is possible to pick a dud from time to time. Fund managers go off the boil or change companies. Sometimes their strategies just don’t suit the current market conditions.

Rather than hanging onto an underperforming fund waiting for a miraculous turnaround, modern financial products make it simple and very cheap to cut your losses and move to a more suitable alternative. With most pension and investment wrappers these days you have the choice of an extensive range of funds from leading fund managers. Use a regular review of your investments as an excuse to ditch the laggards and appoint those with better prospects.

Martin Bamford is site editor of BrilliantWithMoney and a Chartered Financial Planner at Informed Choice.