The markets coming into 2020 and why we recommend starting the year with a portfolio review.

The markets coming into 2020 and why we recommend starting the year with a portfolio review.

Whilst the majority of us have been disconnected from reality enjoying some time off to celebrate Christmas and the coming of a new decade, reality has certainly continued around us and we find ourselves starting the year with some volatility in the markets.

2019 was a great year for most markets. The German Dax, which saw growth of 25% over the year was the best performing in Europe. The S&P 500 in America was up by 27% for the year. Even the FTSE 100, despite all the unknowns surrounding Brexit and the sustained onslaught of media scaremongering, finished 12% up for the year, boosted at the end by a decisive election result. Overall, December was a strong finish to the year. Markets barely flinched when Trump was impeached and U.K markets rallied after the general election.

2020 opened with a bang as a large mob advanced towards the US embassy in Iraq. The resulting situation is something I am sure everyone is aware of and following closely as it unfolds. This has set the path for a volatile start to the year as markets reacted.

Whilst no one can predict what will happen this year, making sure your portfolio is in line with your current risk profile is essential. The start of a new year is the perfect time to review your portfolio. If you have not been monitoring your portfolio on a regular basis, now is the time to resolve to do so in the future.

Having a review periodically will help you understand whether you are on course to meeting your goals, or whether you need to change your strategy. The objective of such a review is to catch mistakes and to correct your course on a timely basis, with the ultimate goal of improving results.

Once a quarter, a portfolio needs to be reviewed to make sure that it is achieving your desired results within acceptable risk and other constraints, such as cash flow requirements and tax considerations.

A regularly scheduled portfolio review is the foundation of a constructive and successful investment program. After all, how else can you determine if you are on track?

Many individual investors tend to look at the bottom line on their portfolio statements to determine progress—am I ahead or behind this month compared to last month? This is one quick way to gauge success or failure, but it stops short of putting things into meaningful context upon which decisions can be based.

Lack of objective monitoring may also explain why investors are likely to sell at market bottoms and sit on the sidelines as markets rebound. Many studies have concluded that individual investors underperform the market due to the fact that they enter and exit their investments at the wrong time. Moreover, investors tend to measure their happiness or lack thereof from trough to peaks and peaks to trough. It’s better to judge performance based on returns compared to risk and whether investment objectives are met.

For example: looking backward, an investment with a return of 10% per year over a 10-year period with a standard deviation (a measure of return volatility: the higher the standard deviation, the higher the risk) of 40% is not as good an investment as another that produced the same returns with a standard deviation of 20%.

Once we know where you are going by setting appropriate investment objectives, your portfolio review will help you reach your destination. How? By identifying problems that can be corrected midcourse. Much like a pilot, our job is to keep you on course so that you can reach your destination safely and in a timely manner.

Get in touch with your advisor and get the year started on the right foot with regard to your finances.

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Andrew Hipshon

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