How to Ensure Investment Portfolios Remain Aligned with Goals

Introduction

When it comes to investing, it’s easy to get swept up in the excitement of markets, returns, and asset growth. But the key to long-term financial success isn’t just about making smart investment choices it’s about ensuring that your investment portfolio remains aligned with your financial goals over time. Whether you’re saving for retirement, a new home, or the education of your children, keeping your portfolio in check is essential for ensuring that you meet your objectives without taking on risk you are not comfortable with.

Many investors, especially those with varied portfolios or shifting priorities, find that their initial investment strategies no longer fit their goals as time progresses. This is where regular reviews and rebalancing come in. In this article, Ellie Pemberton, Independent Financial Planner, explores the steps you can take to keep your portfolio aligned with your goals, ensuring that your investments continue to work for you as you navigate the ever-changing financial landscape.

"The key to maintaining a portfolio that remains aligned with your goals is regular review and rebalancing. A portfolio is not a ‘set and forget’ investment!”

Luke James, Chartered Financial Planner

Define Clear Goals and Risk Tolerance

Before diving into the nuts and bolts of portfolio management, it’s crucial to begin with the basics. The first step in aligning your portfolio with your goals is to clearly define what those goals are. Are you saving for retirement? Perhaps you’re hoping to buy a home or fund your children’s education. Or maybe you're saving for your dream car. Whatever your objectives may be, having a clear sense of what you’re working towards will help guide your investment strategy.

Equally important is assessing your risk tolerance. Risk tolerance is your ability to endure the fluctuations in the market without letting them interfere with your financial peace of mind. The higher your risk tolerance, the more you may choose to invest in assets like equities, which tend to have higher potential returns but also greater short-term volatility. Conversely, if you have a lower tolerance for risk, you might favour safer assets like bonds or cash-equivalent investments. It’s all about making sure your money is working hard while still ensuring you can sleep at night!

Diversify, Diversify, Diversify

Once you’ve clearly defined your goals and risk tolerance, the next step is diversification. The old adage, “Don’t put all your eggs in one basket,” is particularly relevant here. It is hugely important to invest within asset classes, but equally if you are more risk averse, instead of investing 100% into equities, by diversifying your investments across various asset classes such as bonds, you could dampen the likely volatility of your portfolio, making it a smoother ride.

But it’s not just about spreading your money around; you also need to consider correlation. In simple terms, how different asset classes move in relation to one another. For example, stocks and bonds often behave differently during market cycles when stock prices fall, bond prices might rise. Diversification works best when you hold assets that are not closely correlated, so that the performance of one asset class can offset losses in another.  

Regularly Review and Rebalance

The financial markets are constantly in flux, and so too are your investment needs. That’s why regularly reviewing and rebalancing your portfolio is essential for staying on track. Rebalancing simply means adjusting your investments to maintain your desired asset allocation. Over time, certain investments will grow faster than others, causing your portfolio’s balance to shift.

For instance, if your portfolio was initially set at 60% equities and 40% bonds, but the stock market performs well and your equities grow to 70% of your portfolio, it may be time to sell some stocks and buy bonds to restore your original 60/40 balance. This ensures your portfolio remains aligned with your risk tolerance and investment goals.

The frequency of rebalancing depends on your personal preferences or how much your portfolio deviates from its target allocation. Some investors rebalance annually, while others prefer semi-annual reviews or rebalancing based on a threshold such as when any asset class moves more than 10% away from its target allocation.

Consider Time Horizon

Another crucial factor in portfolio alignment is the time horizon for your financial goals. The amount of time you have before you need to access your investments will determine how much risk you can afford to take on. For long-term goals like retirement, you can afford to be more aggressive with your investments because you have time to weather market volatility. The longer you have to invest, the more risk you can tolerate, knowing that you’ll have time to recover from market downturns.

However, for short-term goals such as saving for a house deposit in a couple of years preserving capital becomes more important than seeking higher returns. In this case, a more conservative allocation, such as focusing on bonds or cash-equivalents, might be better suited to minimise the risk of market fluctuations impacting your savings.

"Diversifying your portfolio across different asset classes and reviewing it periodically ensures that your investments match your risk tolerance and financial goals, setting you up for long-term success!"

Keely Woods, Chartered Financial Planner

Seek Professional Advice if Needed

While managing an investment portfolio on your own can be empowering, it’s also complex, especially as your wealth grows or your goals become more intricate. This is where professional advice can make a significant difference! A financial advisor can help you develop a tailored investment strategy that aligns with your risk tolerance and goals. We’ll also offer ongoing guidance, ensuring that your portfolio stays on track as your circumstances and the markets change.

Common Pitfalls to Avoid in Portfolio Management

While the principles of portfolio alignment are straightforward, investors often make mistakes that can throw off their plans. Here are some common pitfalls to avoid:

1. Overconcentration in One Asset Class If You Are Risk Averse: Putting too much of your portfolio in one asset class, such as tech stocks, can expose you to significant risk. Diversification is key to reducing this risk.
2. Failure to Rebalance: Neglecting to rebalance your portfolio regularly can lead to a portfolio that no longer matches your risk tolerance or goals, potentially putting your long-term objectives at risk. Some modern portfolio solutions will automatically rebalance for you, but they might not rebalance as frequently as you would want so it is best to research your investment choice beforehand.
3. Ignoring Tax Implications: Taxes can have a major impact on your returns. Be sure to consider tax-efficient strategies, such as using ISAs or pensions, to reduce your tax burden while growing your wealth.
4. Lack of Review and Adjustment: Life events, such as a change in income, family situation, or retirement plans, can all impact your financial goals. Failing to adjust your portfolio in response to these changes can leave you vulnerable.

What to Do if Your Portfolio Isn’t Aligned with Your Goals

If you find that your portfolio is no longer aligned with your goals whether due to market fluctuations or personal changes, it’s important to take action. First, revisit your financial goals and risk tolerance. Have your circumstances changed? Do you still need the same growth potential, or is it making you uncomfortable?

From there, consider rebalancing your portfolio to ensure it reflects your updated goals. This may involve shifting your asset allocation or making adjustments to how your investments are distributed.

If the process feels overwhelming or you’re unsure of the next steps, seeking the guidance of a financial advisor can be extremely beneficial. They’ll help you navigate the complexities and make sure your portfolio is aligned with your long-term objectives.

Summary

Keeping an investment portfolio aligned with your financial goals requires regular monitoring, rebalancing, and a clear understanding of your risk tolerance and time horizon. By diversifying across asset classes, within asset classes, periodically reviewing your portfolio, and seeking professional advice, when necessary, you can ensure that your investments continue to support your financial objectives.

Ultimately, the goal of any investment strategy is to achieve the financial freedom you desire. By staying proactive and regularly aligning your portfolio with your evolving goals, you can put yourself in the best position to achieve long-term success.

If you're unsure whether your portfolio is still aligned with your goals, or if you’d like to discuss strategies for effective rebalancing, our team is here to help. Get in touch for guidance tailored to your unique financial situation.

Disclaimer: This article does not constitute financial advice. We recommend that you speak to a qualified financial planner for advice tailored to your individual circumstances and goals. Financial markets may go up or down, and you are not guaranteed a return on your investment. Past performance is not necessarily a guide to future performance.