This post is for anyone who wants to manage their own investment portfolio and needs to know how to keep it running smoothly. I’m going to explain how to perform an annual check-up using industry best practice and ideas from some of the best investment educators in the business.

Maintaining your portfolio is easy once you know how. It shouldn’t take more than a few hours, once a year.

This advice also applies if you’ve chosen the default options in a workplace pension scheme and want to know if it’s on track.

Like servicing your car, a little investment maintenance goes a long way.

Here’s a brief summary of the topics we’ll cover on our portfolio management checklist:

• Risk control – straightforward techniques to help you manage risk.
• Performance check – are you on target?
• Inflation adjustment – keeping up with the cost of living.
• Value for money check – are your funds and investment platform competitive?
• Major life changes review – how a bolt-from-the-blue might change the plan.

Risk control

Before we can control risk, we need to know what risks are really worth worrying about. The main investing risks people fear are:

• Being wiped out. That is, losing all your money.
• Not having enough to live on in the future.
• Selling for a large loss.

Losing all your money is a disaster. But it’s a low probability if you invest in a global tracker fund and a high-quality government bond fund.

With a portfolio this diversified, the only thing that’ll wipe you out is a global end-of-capitalism catastrophe. This type of portfolio is not dependent on the fate of a single firm, industry, or even country. Rest easy on that score.

Not having enough to live on is dealt with by investing in growth assets like equities and making sure you put enough money into your pot. This risk is covered in the performance check section of this article.

Selling at a large loss is the main risk that lies in wait – like piano-wire strung across your future. This risk is harder to control and widely underestimated. It can overwhelm you with little warning.

There are two versions of this nightmare scenario:

Failure to recover

The failure to recover scenario happens when a large pension portfolio is heavily invested in risky assets like equities – and then a stock market crash strikes on the eve of retirement.

The portfolio suffers a major loss. The market bumps along the bottom for years. You’re forced to live on less because anemic equity returns fail to resurrect the portfolio.

The investment portfolio management techniques laid out below can help you to guard against this risk.

Panic sell

The stock market drops violently. The fear of losing everything swamps your mind. You panic and sell. The red line continues as you sit in cash, too frightened to buy back in the face of bad economic news.

The green line shows that the market decline did continue after you sold. But a rally began shortly after, and eventually traced a U-shaped recovery. Equities recovered their losses and more, given enough time. But the red path shows how your loss was locked in.

These calamities befall unwary investors around the world during every stock market crash. Nobody thinks it will happen to them, like that Twilight Zone episode about the box.

Three risk control techniques enable you to tame these risks without hobbling the equity growth you need:

• Monitoring your risk tolerance in a downturn
• Rebalancing
• Lifestyling

Monitoring your risk tolerance

How much stock market risk can you handle? No-one knows until they’ve watched a crash vaporise pounds from their portfolio.

Your portfolio may have defaulted into an industry-standard mix of 60% equities, 40% bonds. This is the Goldilocks zone – neither too hot, nor too cold.

Or, perhaps you chose your allocation to risky equities using a classic rule-of-thumb like:

110 minus your age = your equities allocation (the rest is in bonds)

Both are reasonable starting points, but the gut test is a bear market. Your response to a mauling tells you whether your asset allocation is too risky for you.

The wealth manager and investing educator William Bernstein offers a way to readjust using this table in his superb book The Investor’s Manifesto:

Risk tolerance	Equity allocation adjustment
Very high	+20%
High	+10%
Moderate	0%
Low	-10%
Very low	-20%

Choose a government bond fund for the non-equity part of your portfolio.

Your risk tolerance is:

Very low if during the last bear market you suffered sleepless nights, felt sick, or panicked. Subtract 20% from your equity allocation. Now you’ll hold more in bonds for extra crash protection, but must expect lower growth.

Low if the downturn caused you mental pain. Subtract 10% from your equity allocation.

Moderate if you felt worried but held your nerve without losing sleep. No change to your allocation.

High if you rebalanced into tumbling equities during the bear market. Add 10% to your equity allocation.

Very high if you’re frustrated the market didn’t slide further, enabling you to scoop up more equities on the cheap. Add 20% to your equity allocation.

Beware, this table is a rule-of-thumb only. I find it helps to use market tremors to re-calibrate my risk levels before I’m hit by something seismic.

Use it at your own risk.

Rebalancing

Rebalancing is a portfolio management technique to prevent your asset allocation from drifting into dangerous territory. This might happen when equity markets go on a tear – soaring to the sound of popping champagne corks in the City.

The dark cloud in the silver lining is that rising valuations can silently shift your equity allocation. You might easily go from, say, a desired 60% in equities to an actual allocation of 70% or more.

Rising equities sounds fine until the market crashes back to Earth with terrifying speed and savagery. The nosedive takes your portfolio with it, because you hold proportionally less bond protection than you used to.

Annual rebalancing counters this risk by nudging your allocation back into line. It’s like when you touch the steering wheel of your car to prevent it veering out of its lane.

By selling some of your outperforming assets once a year and buying laggards you:

• Realign your asset allocation with your chosen risk level.

• ‘Sell high and buy low’ – looking to profit from the tendency of underperformers to bounce back. (Or mean-revert, in the jargon).

We’ve explained before how annual rebalancing is done. It’s simple.

Easier still if you rebalance with new money.

If you’re invested in a multi-asset fund like Vanguard LifeStrategy then your portfolio is automatically rebalanced for you.

Auto-rebalancing only applies to such multi-asset funds. For example, a fund that holds equities and bonds in the same investing vehicle.

You can email your fund provider to find out how they rebalance.

It’s fine to rebalance once a year.

Lifestyling

Lifestyling is a brilliant way to head off the failure-to-recover scenario, wherein a portfolio is poleaxed by a crash just as you’re on the home straight to retirement.

You can also use the same principle to manage an investment portfolio earmarked for a non-retirement objective, such as a uni fund for your kids.

Retirement lifestyling

The standard advice for young investors is to choose an aggressive equity allocation, perhaps as high as 80%.

That’s a pro-growth strategy. It’s predicated on the idea that as a young person you can shrug off a market meltdown because:

• You don’t have much skin in the game. If a small portfolio halves in value, you’re unlikely to panic. The loss is dwarfed by your future investment contributions.

• The bulk of your working life is ahead of you. You can afford to wait for the market to recover and buy equities cheap in the meantime.

This is the theory of human capital underpinning that ‘110 minus your age’ rule-of-thumb.1

The logical consequence is you should be in 45% equities, 55% bonds as you turn 65.

Lifestyling using this rule means you sell 1% of your equities and buy 1% extra in bonds, every year, to manage the transition.

You can do it at the same time as you rebalance. This way all of your portfolio maintenance is done in a one-er.

This subtle drip-drip of wealth from equity stalactite to bond stalagmite transforms your portfolio. Instead of a petrifying dagger ready to drop from the ceiling, your portfolio de-risks into a mighty tower of wealth anchored by a floor of shock resistant assets.

However, the ‘110 minus your age’ wisdom was devised when bond return prospects were better than today.

Stay on target

A more modern incarnation of this idea is a Target Date fund. Like the lifestyling heuristic, Target Date funds gradually shift your asset allocation from equities to bonds as you age.

Vanguard’s version – a Target Retirement fund – keeps investors 80% in equities until age 43. The fund then automatically descalates your risk by lifestyling down over time to 50% in bonds by age 68.

If you mimicked this path by lifestyling equities to bonds at 1% per year from age 40, you’d be 60% equities by age 60.

This pattern acknowledges the muted growth prospects of a low interest rate world.

(It also assumes a classic retirement age of around 65 to 68. You’d de-risk earlier if you’re on track for Financial Independence Retire Early.)

Don’t ignore your own risk tolerance if you’re young yet 80% equities makes you uncomfortable.

Go lower if you need to, or aren’t sure how much you can handle.

That said, people who choose Target Retirement funds typically leave them on auto-pilot.

Blissful unawareness of market quakes makes it much easier for Vanguard to hold people at 80%.

I believe Target Date funds are a brilliant idea. If you don’t fancy managing an investment portfolio at all, they’re a godsend.

But personally I think Vanguard’s Target Retirement fund weights bonds too heavily later in life. Its equity allocation is only 30% by age 75. That’s a decision for another decade, though.

You can always weight your portfolio differently nearer the time.

Lifestyling for non-retirement objectives

You’ve seen those industry warnings about equities being unsuitable for objectives fewer than five years away.

Equity volatility means you never know how much your shares will be worth tomorrow. So if you want to save for a specific amount on a specific date, equities are not reliable.

Retirements can be delayed – or you can live on less. But perhaps you’re investing to send the kids to college in 18 years time, or to pay off the mortgage in 25 years? (Ballsy!)

Holding 50% – or arguably even 20% – in equities is madness as you glide into land, if you haven’t got any other way of avoiding an undershoot.

Larry Swedroe is another renowned wealth manager dedicated to educating investors. He came up with a rule-of-thumb for managing this risk in his book The Only Guide You’ll Ever Need for the Right Financial Plan:

Investment horizon (years)	Max equity allocation
0-3	0%
4	10%
5	20%
6	30%
7	40%
8	50%
9	60%
10	70%
11-14	80%
15-19	90%
20+	100%

Notice how Swedroe puts the portfolio on a steep descent out of risky equities inside ten years from the target date. This speaks to the unpredictability of equities.

Over the long-term, equities are the best asset for growth. But anything can happen in the space of a few years.

Remember this is an informed rule-of-thumb. Treat those equity allocations as a maximum. Dial them back more if you can, and keep the rest in bonds and cash.

Performance check

How do you know if your investments are doing well? Should you switch funds that haven’t performed well in the last year? What about that co-worker who keeps banging on about the killing he’s making in crypto?

First things first: your portfolio is likely heavily exposed to the stock market. So your annual performance will turn on the fortune of the market that year, for better or worse.

The evidence shows you can’t avoid that truth but you can turn it to your advantage.

It’s a myth that you can identify a brilliant fund manager or stocks to beat the market over the long-term. What looks like over-performance is often a lucky streak. Or it costs so much in fees that you end up worse off.

The antidote is a passive investing strategy that uses a diversified portfolio of low-cost index tracker funds to cream off the profit from the market.

Global stock markets rise over the long-term so you should do very well as your profits compound.

The counter-intuitive truth is that you don’t need to worry about your portfolio’s performance day-to-day – or even annually.

But the short-term is a crapshoot.

The market has a roughly 50:50 chance of a loss on any single day. It’s likely to be down one year in three. But it recovers, and over 20 years equities are favourite to outperform every other asset class.

So for the best peace of mind don’t check your portfolio more than annually. Don’t download a mobile portfolio app. The longer you leave it alone, the better your chance of seeing good news when you check-in.

Ignore short-term fluctuations, because you can no more control the market than King Canute can command the sea.

As for that annoying co-worker, he’ll slink back under his rock next time his dogecoin is slaughtered by a careless Elon Musk Tweet.

Factors you can control

The factors that decide your fate and that lie within your control are:

• How much you invest
• For how many years you invest
• Your target income
• Investing costs

The magic formula is:

• Invest more to enjoy a bigger income in retirement and/or shorten your timeframe.
• Invest longer to enjoy a bigger income and/or lower your investment contributions.
• Lower your target income to invest less and/or shorten your timeframe.
• Lower your costs to improve every outcome.

You can see how this works by playing with the excellent retirement calculator at Hargreaves Lansdown. It enables you to feed in your personal numbers and check whether you’re on track to retire.

Think the income you’re headed for is tight? Then watch how your fortunes change if you increase your contributions or delay your retirement.

Perform this check annually and you’ll have a firm grip on whether your pot and contributions are big enough, based on current projections.

Don’t mess with the calculator’s 5% estimated annual growth rate. But you can lower the annual management charge to 0.5% (via ‘advanced options’, tucked down bottom right on the results page) if you choose keenly-priced tracker funds and a competitive platform.

• Find out more about using a pension calculator to stay on track.
• Our financial independence plan article will help you work out how much retirement income and pot you’ll need.

Inflation adjustment

Just as inflation nibbles away at your wages, it also gnaws away at your pension.

Up-weight your investment contributions in line with inflation every year to help your portfolio keep up with prices.

You can find the UK’s official inflation figures at the ONS.

• CPI-H is the headline rate. It takes housing costs into account.
• RPI is almost always higher. Using this may put you ahead of the game.

Some Monevator mavens use their personal inflation rate or average UK earnings as potentially better gauges of the cost-of-living.

Calculate your inflation-adjusted contribution as per this example:

Current monthly contribution: £500

Annual inflation rate: 3%

£500 x 1.03 = £515 new monthly contribution adjusted for the past 12 months of inflation.

You should increase your target income and target retirement pot number in exactly the same way.

Value for money check

As long as you’ve chosen a price competitive portfolio of index trackers then you don’t need to worry about switching investment funds. Switching for performance-related reasons is like changing toothpaste brand in the hope of better results on the dating scene.

But it’s worth checking that your trackers still offer good value versus their rivals every few years.

Check using our comparison of:

• The best global equity trackers
• The best bond trackers
• Other asset classes

Investing platforms/brokers also charge fees. Make sure they’re not milking you, either. Our broker comparison table shows your options.

We’ve previously outlined how to find the best value platform for you.

There’s no need to perform this check annually. Every three years is enough to stay in touch with the price league-leaders.

Don’t sweat tiny changes in cost, either.

A fee differential of 0.1% on £10,000 is just £10. That would cost you £50 a year on a £50,000 portfolio if, for example, your fund’s Ongoing Charge Figure (OCF) is 0.25% instead of 0.15%.

Tax loss harvesting

If you own investments outside of your ISA or SIPP then you can reduce your capital gains tax bill by offsetting trading losses before the April 5th deadline.

Major life changes review

Marriage, children, career change, redundancy, divorce, ill-health, death, inheritance…Such milestones of life may trigger a reassessment of your investment portfolio and your risk tolerance.

For example, an inheritance may transform your fortunes. Perhaps you can reduce your equity exposure. You need less growth, so you can take less risk.

On the other hand, an even bigger windfall can catapult you so far ahead that you can take even more risk! If you’ve already got more money than you can spend, it doesn’t matter how your equities perform.

It’s nice to dream but major life changes could be the perfect time to seek financial advice.

Managing an investment portfolio checklist

Here’s a run through of the techniques we’ve explored in this article:

Monitoring risk tolerance
Frequency: After every major downturn of 20%+

Rebalancing
Frequency: Annually

Lifestyling
Frequency: Annually

Performance check
Frequency: Annually

Inflation adjustment
Frequency: Annually

Value for money check
Frequency: Every three years

Tax loss harvesting (not possible within ISA/SIPP)
Frequency: Annually

Major life changes review
Frequency: As and when

I wish you good fortune in managing your investment portfolio. It’s entirely doable to go the DIY route provided you stick to the investing essentials and ignore the get rich quick sirens of YouTube. You don’t need specialist knowledge, skills, or a huge amount of time.

I’ve never regretted managing my own portfolio.

Let us know how you get on.

Take it steady,

The Accumulator

1. Or 100 minus your age, or 120 minus your age, or whichever version you subscribe to. [↩]

This article on learning Cantonese and investing comes courtesy of Budgets and Beverages from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

‘Yam Yam Tsaa?’

‘Hawa, hawa’.

This has become my favourite phrase when I visit my in-laws. Phonetically written, it means ‘Cup of tea?’ with my response being ‘Yes. Yes.’

They’re Chinese you see, and they speak Cantonese. I don’t. But as I’m on a constant search for where the next hot beverage is going to come from, I had to learn the essentials.

And learning the essentials has led me to trying to learn the language completely, enrolling on a ten-week beginner Cantonese course.

(Spoiler alert: It’s a really hard language to learn.)

Learning Cantonese and investing

Slowly and surely, I’m beginning to pick things up.

Every Thursday evening, I arrive at my Cantonese class (online of course) and I listen, read and practice. In really basic terms, I’m starting to see progress.

The same can also be said about my investing portfolio.

I’m in the early days with that, too.

On reflection, it appears Cantonese isn’t the only language I’m trying to learn.

The world of personal finance is completely new to me. There’s new phrases to learn, new voices to listen to, and new ideas to understand.

Six months ago, I had no idea about compound interest, low-cost broad-based index funds, or the world of financial independence.

But on one miserable afternoon in Manchester, with a hot cup of tea my only source of any warmth, I googled ‘how to retire early?’

And I plunged so deep into the rabbit hole of financial independence, that my beverage went cold.

Just kidding. I’d never allow that to happen.

The world of financial independence

Just like with Cantonese, I began to listen, read, and learn.

And just like with Cantonese, I quickly began to realise there is plenty of information to take on board with investing.

So I went back to basics and started with the essentials.

For me, that was reading JL Collins’ book The Simple Path To Wealth. Original right?

But it worked. I began to understand the basic concept of index investing, ETFs, and the power of ‘buy and hold.’ The last being a useful lesson to learn during a global pandemic.

Enthused, excited, and energised, I wanted to learn more. And herein lies my next lesson learnt.

Ask for help

As you’ve probably gathered, my partner is Chinese. She speaks Cantonese fluently and communicates with her family in this language, even in my company. No exceptions are made on my behalf.

Side note, this was also the case when I went to Hong Kong a couple of years ago. After many months apart, my partner and her extended family caught up on each other’s lives, whilst I hoovered up as much dim sum as possible. That and green tea of course. By the end of the trip, I weighed a lot more but I was VERY refreshed.

Anyway, I digress.

Despite hearing Cantonese in my life daily, I never asked for help. I’d shut myself away, trying to learn it secretly, whilst dreaming of the day I suddenly interrupted my partner’s family conversation by joining in with Cantonese.

Their faces would be a picture! Oh how we’d laugh!

Realistically, this was never going to happen.

Until I asked for help. I not only invested in myself with an educational course, but I told my partner and her family about my intentions. Surprise, surprise, I’ve learnt more in four weeks than I did in the previous four years of sporadically and secretly trying to learn it on my own.

Again, the same can be said about investing.

With my Vanguard account open and my first deposit made, I imagined the moment of handing in my notice and walking into my new future.

‘Where are you going to?’

‘Nowhere, I’m retiring early.’

What a moment that would be!

Except, in the first month, my index fund went down. And down. And down again. Had I withdrawn, I’d have lost a decent sum of money. With ‘buy and hold!’ ringing in my ears, I left it alone. Thank goodness I did.

But it was a lesson. I needed to learn more.

So I asked for help.

That came via books, podcasts, and reading blogs. Genuinely, a lot of the help I got was from this website. And they haven’t even paid me to say that. Although they have sent me a box of PG Tips, so read into that what you wish.

There’s plenty of help out there, in a medium that serves you best.

As a helping hand, this is a good place to start.

Small steps lead to momentum

The thing is, asking for help initially has led me to learning more, meeting new people and now, writing my first blog for Monevator.

Honestly, it feels a bit surreal.

Six months ago, I had no idea about any of this. Now, I’m fortunate enough to be writing about something that I feel really passionate about.

No longer am I interested in keeping it a secret either. I want to play my part in helping others start their journey too.

Although here’s the disclaimer: I’m still learning the essentials.

The lightbulb moment

Even that can feel like a pretty big place to start. But the point is starting. Because once you start learning, it’s hard to find the brakes.

Dave Ramsey (a big player in the financial independence world) speaks about snowball momentum when it comes to paying off debt.

The idea that you pay off your smallest debt first, and once complete, you move those payments to the next largest debt, before rolling that into your next debt, and so on and so forth. With each debt paid off, your debt-clearing payments will become bigger, so the next debt gets paid off faster. You’ll gain momentum and see progress.

For me, this concept doesn’t only apply to debt.

Whether it was paying for my course or reading my first personal finance book, I got the ball rolling. Now momentum is gathering pace.

Why? Because I’ve had my lightbulb moment. In fact, I’ve had a fair few of them. That moment when something clicks, when you understand it, when you feel yourself gain knowledge. It’s a wonderful release of endorphins.

Last month, I heard my partner chatting to her dad and I understood a handful of words. It was a brilliantly reassuring moment. Sure, it was a half-hour conversation, but let’s not run before we can walk.

I also recently introduced my sister to low-cost broad based index funds. When she asked me why she couldn’t just put her life savings into Costa, Starbucks, and Pret a Manger (I’m not the only beverage-addict in the family), I explained the importance of diversification and why it’s vital to have an equity/bonds balance that suits her tolerance for risk and volatility.

I’ve just re-read that last sentence. It’s laughable that I can even put those words in that order. Six months ago, I had no idea about any of that. But this emphasises my point.

You don’t need to make a big statement. You don’t need to set unrealistic targets. The beauty about learning how to manage your money is that there is no finish line. And that’s not a bad thing. You can go as far down this road as you wish, at your own pace, having as many lightbulb moments as you want. Just make sure you get off the start line.

I’m not going to be fluent in Cantonese by the end of this year. I won’t be fluent by this time next year. My children will probably be able to speak it better than me.

But I know, that as long as I keep reading, listening and practicing, then I’ll get better and I’ll gain more knowledge.

The same applies to my financial independence journey.

The world of financial independence is huge. But please don’t be overwhelmed. Together, we can just start by learning the essentials – and flick on some lights as we go.

As long as we flick the kettle on, too. Although I have no idea how to say that in Cantonese!

In time you will be able to see all Budgets and Beverages’ articles in his dedicated archive.

What caught my eye this week.

Every time a US financial pundit talks about the long bull market or sky-high equity valuations, remind yourself they’re almost invariably talking about US shares.

The US comprises roughly three-fifths of the global equity market by value. Handy for North American home bias fans.

And of course the global tracker funds that passive investors are well advised to use will therefore be very exposed to the US market, too.

Finally, where the US leads, others tend to follow – directionally if not in lockstep.

So the dearness or otherwise of US shares matters.

Still, it’s interesting to compare Uncle Sam’s rip-roaring equity-ganza with our own domestic damp squib.

US versus UK shares in terms of returns

The latest edition of the Barclays Equity Gilt Study summarizes returns from the US and UK markets in its usual tables.

Here’s the returns from US assets:

And here’s the returns from the UK:

Over the past 20 years US shares have delivered real returns of 5.5%. That compares to just 1.7% for their UK counterparts.

And in the last year covered, US shares clocked up over 19% in gains.

Whereas UK shares delivered worse than 10% in negative returns.

The old switcheroo

If you wonder why US shares are all the rage after seeing these numbers, you need a new hobby.

And if you don’t appreciate at a glance why the tech-heavy US index pulled ahead during a stay-at-home pandemic, you’ve got some reading to do.

However I believe it’d be a huge mistake – as so many seem to do – to think US shares will continue to outperform anything like so heavily, for decades to come, while the UK market slides into irrelevance.

These things have a habit of correcting themselves. I expect over a very long period US shares will still put up higher returns – for various structural reasons – but I’d be surprised if the UK doesn’t have the edge over the next 20 years.

Unfortunately, that’s a hunch, not a scientific fact. Over the long-term starting valuations matter, but they don’t explain all of subsequent returns.

And in the short run, anything could happen.

Still, if you’re one of the vanishing breed of stock pickers who hunts your quarry on the London Stock Exchange, you might breathe a little easier.

Also if I was a passive investor in the Vanguard UK LifeStrategy funds that slightly overweight UK equities, I’d not lose a moment of sleep over it.

If there was ever a time to be a mildly (tilted, never all-in or all-out) nationalistic UK investor, it would seem to be now.

Have a great long weekend everyone!

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