Why your portfolio review is probably overdue

New Year's resolutions are often made with the best intentions of following through, only to be forgotten within days or weeks.

If you made a resolution to review your investment portfolio, and to take steps to rebalance it in the new year, do yourself a favour and make sure you actually do that review – and sooner rather than later. If you didn't make that pledge, add it to your priority task list.

As I noted in my article Time to get into some super rebalancing (December 14), regular portfolio reviews are prudent to ensure your overall investment strategies remain focused and your asset allocations are well balanced. Investment portfolios, like cars, need to be checked and re-tuned on a regular basis. Parts need to be replaced from time to time, and staying on cruise control isn't an option.

Which is why investment research released this week by stockbroking firm CommSec is somewhat alarming, especially when it is overlaid with September quarter self-managed superannuation fund (SMSF) statistics published in December by the Australian Tax Office.

In a nutshell, CommSec's research shows SMSF trustees are fixated on Australia's top 20 largest stocks when it comes to the share market.

SMSFs were the largest net investors in the ASX Top 20 during 2016, with the four major banks making up more than 32 per cent of SMSF holdings. That's despite increasing concerns among analysts about the earnings sustainability of the big banks, with ratings agency Fitch also revising its outlook on the sector to 'negative' earlier this week.

According to CommSec, banks comprise nearly a quarter of all trades by value for SMSFs.

Our own analysts have Hold ratings on ANZ, Commonwealth Bank, NAB and Westpac, and every other company in the ASX Top 20 for that matter except for Brambles, which currently is being recommended as a Sell. (Click here to see our full list of stock recommendations.)

Now, that's not to say that investing in our biggest companies is a bad strategy. Far from it, and they should form part of every share portfolio and long-term investment strategy. But it's also important to diversify, across shares and other asset classes.

Separate SMSF investment data from the ATO shows that Australian shares were the biggest beneficiaries of investment funds in the September quarter, with the total value of self-directed super dollars invested in stocks rising by $8.8 billion in the three months to $192.4bn.

But that figure is almost matched by the huge amount of SMSF funds ($157.4bn) invested into cash – which is equal to about one-quarter of total SMSF investor assets – an alarming statistic in its own right given the dismal returns from bank accounts. (See our story last week, SMSFs in a high-risk cash gamble).

Investors would be much better served, returns wise, by redirecting more of their cash into assets such as shares that generate higher growth and income.

That's where picking the stocks with the best prospects is crucial.

After the big banks, CommSec's research shows that SMSF trustees prize the big resources stocks BHP and Rio in their portfolios (11 per cent), with Materials and Energy accounting for nearly another quarter of trades by value for SMSFs. Other key holdings include telecommunications stocks, namely Telstra (7.8 per cent), diversified financials such as Macquarie and big insurers QBE (6.4 per cent) as well as Wesfarmers and Woolworths (6.0 per cent).

Yet pleasingly, the CommSec research shows SMSFs are also moving towards the mid to small cap market.

According to Marcus Evans, head of SMSF Customers for Commonwealth Bank, while SMSFs were net buyers of the banks and resource stocks over the past 12 months, CHESS holdings of stocks outside the ASX100 have grown by 3 per cent.

The use of exchange-traded products – such as exchange traded funds (ETFs), listed investment companies (LICs) and exchange-traded managed funds – to diversify into international equities has remained constant at around 2 per cent of total CHESS holdings. SMSFs make up about a quarter of all ETF trades, although ETF activity was down marginally on 2015.

According to Evans: “One pattern that is emerging is the move from ETFs to direct shares when the market spikes down and specific shares become attractive from a valuation perspective.”

Current SMSF research by Super Concepts also indicates an increased allocation to hybrids by the funds under its administration. SMSFs make up 50 per cent of hybrid holdings in CommSec, and in total these have increased by 18 per cent in the period from August 2015.

Starting the review process

There's no time like the present to check your portfolio holdings and it's a relatively quick process. In fact, reviewing the health of your investment portfolio should be a regular habit.

Click to InvestSMART's free portfolio manager tool to enter your asset details and view your current asset allocation ratio, based on your specific investment goals.

For investors with a lower-than-recommended Allocation Exposure Score the most prudent course of action is to rebalance one's asset allocation to improve diversification, reduce risk and improve returns.

A good way of doing this is to simulate changes to your current investments and/or add new investments to see how they could affect your overall portfolio's diversification.

Before leaping into any investments, it's vital to undertake comprehensive research. This is an area where many investors fall short and they often either overpay or fail to take into account the underlying dynamics of either the broader market, a sector and – when buying shares – those factors impacting a specific company.

The key to successful portfolio management is having, and sticking to, defined investment objectives. Emotion should never come into play but when circumstances dictate active investors should be ready, and prepared, to respond.

It's all about being in control, using the vast array of information available to build and maintain a well-balanced portfolio of assets, and to maximise investment returns over the longer term.