Portfolio Review: Did you pack your own luggage, Sir?

What's worse than getting pulled aside for a random airport security check? Answer: Being pulled aside and realizing that you didn't pack your own luggage and you don't know what's inside...

The majority of Canadians experience this same situation when it comes to their investments. They don't know what's packed in their portfolio because they've let someone else do it. They only loosely know what the contents are, what they're paying in fees, and whether or not the investments even fit them. There are many great financial advisors out there but there are also many advisors that, due to a commission-based system, have a conflict of interest when it comes to offering advice. 

Here are some main reasons why everyone should get an objective, unbiased portfolio review:

1) Understanding Fees: The MER (management expense ratio) is usually not presented clearly on financial statements nor are they discussed in detail when you buy expensive products such as mutual funds. Canadian mutual funds in particular are notorious for being some of the most expensive funds in the world and can often charge between 2% - 3% of your portfolio each year whether your investments went up or down. On a portfolio of $100,000, that can be approx. $2,500 a year in fees! There are other cost effective solutions to building a portfolio as outlined in my article "Passive Investing Solutions".

2) Historical Returns: Many investors are unsure about their prior year returns. Did your portfolio beat their benchmark index? Did it lag? It is very difficult for investors to understand whether their investment strategy is working. A portfolio review can reveal if the funds you have been investing in have been outperforming or under-performing their market benchmark.

3) Knowing your Asset Allocation: A portfolio review can reveal how much equity vs. fixed income you have in your portfolio, which helps determines the level of risk you have. A review can also reveal how globally diverse your portfolio is. Many Canadians have a tendency to invest mostly in Canadian stocks or mutual funds which is often called home country bias. Being too heavily weighted in Canada is a diversification risk as the Canadian market only makes up 3% of the world market and is made up of mostly financial and resource stocks. Is there the right balance in your current portfolio and is it consistent with your risk tolerance, goals, and time frame? See 'Model Portfolios' for ideas of what type of balance and diversification I  like to see in a portfolio.

4) Knowing your Expected Return: A portfolio review can show, based on your asset allocation, what an expected return over the long term could be for your portfolio. This is important for any type of retirement projection and to fully understand whether your investments will meet your future needs. Based on the Financial Planning Counsel's recommendations, the expected return of US and International Equities is 6.8% while Canadian Equities is 6.4%. Fixed income holds an expected return of 4%. Based on your asset allocation, we can work out what your portfolio expected returns are over the long term and then use that return to project out into the future. 

5) Understanding the Strategy of your Portfolio and whether it fits with your Goals: The selection of assets in your portfolio will tell a story about what purpose the portfolio is designed for. The portfolio review can help us understand whether that strategy and risk/return profile is consistent with your goals, risk tolerance, and time frame. Is the strategy an active one or is it passive? Income or growth? A portfolio review also reveals what  the decision-making process is when it comes to re-balancing your portfolio. Is it automated or must someone decide when and which fund/stock to buy.

Don't get caught unaware of what's been packed in your financial luggage. At the end of the day, you will be responsible for the contents when you're answering to your future self and family. With a well-packed and thoughtful portfolio review, you'll be carefree and vacationing in the sun just as planned!