The New Year portfolio checklist

CommSec expects the S&P/ASX 200 to rise 13.2% this year, closing at 6100 points. David Cassidy of UBS anticipates the same benchmark to reach 5700 points, the same level he predicted for 2014 at the beginning of last year 'before revising it lower'.

The Executive Committee of Australian Business Economists expects the ASX 200 to rise by a more modest 2.9% by 30 June 15 and sees the Australian dollar falling to 83 US cents. Meanwhile, Bell Potter's Peter Quinton see the ASX 200 closing at 5850 by year end.

In a fleeting moment of lucidity, former state Premier of Queensland Joh Bjelke-Petersen had a phrase for this kind of journalistic flimflam; 'just feeding the chooks' he called it.

It wouldn't be New Year without the sages and seers dropping their predictive effluence into the pages of the mainstream media. You can't blame them. Most would appreciate both the intellectual banality of the forecasts and the promotional opportunity they afford.

This year we'll break with tradition and make a few predictions of our own. First, we'll wager that none of said sages will recall their current predictions this time next year, for reasons that will become apparent. Secondly, if any do prove accurate none will acknowledge their good fortune.

Market forecasts are like stock recommendations; make enough of them and some will inevitably prove accurate. If you get the kudos for being occasionally right and your failed forecasts are readily forgotten, why wouldn't you make as many as possible?

To really do your portfolio a favour this holiday season, call for the cleaners rather than the fortune tellers. Here are eight ways to ensure your portfolio is buffed and polished, ready for whatever the year ahead has to offer.

1. Do your holdings meet our portfolio limits?

Last year our income portfolio grew 19.6% and our growth portfolio 14.5%. In comparison, the benchmark ASX All Ords Accumulation Index returned 4.7%. Some big winners are buried in these figures, meaning that some of the top performers in your portfolio many have breached our recommended portfolio limits.

If you don't maintain your own figures, these are easily compiled in Excel. Or use the Sharesight portfolio management tool (ritual declaration: I am a director of Sharesight), available free to Premium members. Here's more information. 

2. Are you too overweight the banks?

Nowhere is the issue of portfolio allocation more pertinent than in the banking sector. Members should by now be aware of our 20% portfolio limit on the big four. Despite that, one conservative member admitted to a 90% portfolio exposure in June 2013, and we doubt he's alone.

Whilst the banks would be bailed out in a crisis that doesn't mean shareholders would be saved. During the GFC governments saved bondholders whilst telling shareholders to go hang. The best way to manage this risk is through adhering to our portfolio limits.

Emergent risks in the sector only add to the argument. The David Murray-led Financial System Inquiry recommended higher bank capital ratios and a change to banks' internal risk-weighted models. Both measures would increase funding costs.

Pressures are also building against excessive property investment lending, which no accounts for around half of all new property loans. ASIC is investigating this area, APRA is warning banks to also increase their capital levels if lending growth in interest-only loans grows at more than 10% annually and the Murray inquiry is recommending scrapping gearing in DIY super altogether.

With the Commonwealth Bank share price recently hitting market highs, many investors appear unconcerned by measures that may crimp profitability and increase funding costs. We think they're wrong. Fifteen years ago the value of housing stock accounted for about 200% of GDP. Now it's over 300%. The case for members to stick to the 20% sector limit has grown stronger in the past year.

3. Are you holding enough cash?

Cash weightings are a tricky business. Some analysts prefer a small cash weighting on the basis that to do otherwise is to presume one can time market corrections. Others like the flexibility cash offers, especially when the local economy is facing substantial threats.

Whichever camp you fall into, it's time to work out your cash allocation and ask yourself whether you're happy with it. Here are a few prompts to help you answer that question:

- Opportunities are starting to emerge in resources and mining services. Do you have the cash to take advantage of them?

- Are there stocks on our buy list that offer better overall returns than you're getting from cash, without much additional risk?

- What stocks would you sell if you knew an Australian recession was likely?

- Will your portfolio will deliver the income you need to live this year?

- When was the last time you shopped around for better cash rates?

- If you thought you could get a better return by allocating a greater proportion of your portfolio overseas, would you opt for a lower cash weighting? 

​4. Is your portfolio prepared for an Australian recession?

Accepting the possibility of a slowing economy could have a big impact on your ideal portfolio structure. In reference to point 3 above, it may lead to a higher cash allocation. It may mean you switch away from domestically focused holdings like the banks and insurers to companies with overseas earnings exposure.

Our Buy List currently features a number of stocks with high overseas earnings exposure, including Computershare, Hansen Technologies, News Corp and Trade Me.

It may also mean you should reduce your exposure to local stocks in favour of international opportunities, which, with our new Premium service, is now a lot easier (see Nathan's Three US Stocks to Buy Now, available free to Premium members).

Alternatively, our recent special report Exchange Traded Funds – A Beginner's Guide offers advice on how to gain cheap overseas exposure. Or you could opt for a fund like Forager's International Fund.

It's been 24 years since we experienced a recession, although the dotcom crash and the aftermath of the GFC took us pretty close. Many investors have forgotten what a recession looks like and, by implication, haven't structured their portfolios to deal with the possibility. That's not a mistake you want to make.

5. Is your paperwork up to scratch?

We all know the paperwork involved in investing, especially through an SMSF, is a royal you-know-what. Our regulators seem obsessed with process and box ticking, which appears to have no bearing on their ability to prevent impropriety and criminality.

Even more galling is the fact that whilst small investors face harsh penalties for minor transgressions the big end of town is getting an even easier ride. The ATO is running a pilot program outsourcing its tax collection remit to advisors like PwC and KPMG, the very same companies that help large businesses minimise tax. Meanwhile, SMSF investors face punitive fines for minor paperwork breaches. It's simply too expensive to chase big tax avoiders so the burden is falling on the small fry. That's us.

With a 1-in-50 chance your SMSF will be subject to a tax audit, getting your paperwork in order is vital. Now's the time to tidy up those loose ends, check that the structure you've got is the right one for you and make sure the paper trail would survive an ATO audit.

6. Are you overweight speculative stocks?

Of the 28 stocks on our Buy List, 12 are speculative. That's an unusually high percentage, especially for conservative investors who shouldn't invest in speculative recommendations at all or, at the most, limit their exposure to 5-10% of their portfolio.

With prices among high quality blue chips increasing over the past few years we've found many opportunities in speculative stocks. Those that have followed them may own a portfolio over-exposed to this end of the market. Check what percentage of your portfolio is allocated to speculative stocks and if the figure is too high, make the necessary adjustments.

7. Are you spending less than you earn?

This is the most basic requirement for financial wellbeing but one often forgotten. With tools like NAB Money Tracker, ANZ MoneyManager, Commonwealth's NetBank My Spend you can quickly and easily see how much you're spending and where. You simply don't have the excuse now not to work out where you can save more and spend less.

8. Are you increasing your knowledge?

Each year, investors should become that little bit better at their craft. And the more you read and reflect on your successes and failures, the better you'll get. Intelligent Investor Share Advisor has already published three reading lists but our latest, 17 Books to Read to Become a Top Investor, is our best yet. Pick a few titles that take your fancy and commit to reading them this year.

Just as importantly, set aside 30-60 minutes a week to catch up on all the latest research from Share Advisor. With a new website, new services and a greater focus on Buy recommendations, it's going to be a great year. We're glad you're with us to enjoy it.