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Periodic investment health checks needed

Everyone should get a health check now and again. As you get older you should get more regular check-ups in order to catch potentially life-threatening diseases early. In a similar fashion, you should give your investments a regular health check, and the closer you are to retirement, the more frequently you should have your portfolio checked. A portfolio health check will let you know early if you have any wealth-threatening investments.

There are a number of ways you can do this. Unlike medicine, you can teach yourself how to perform a health check on your investments or you can get expert advice. The first takes a bit of time and a lot of discipline. As the great investors of our time say, investing is not easy. If it were, we would all be millionaires.

You could get expert advice from a financial adviser, but this could be expensive. Like doctors, financial advisers charge a service fee, based on hours worked.

A third choice is using an automated advice service, sometimes called robo-advice, where you do some of the work and the people behind the automated advice service provide standard asset allocation reviews or share portfolio check-ups. The benefits are that the service is provided at a fraction of the cost (in some cases free), though being standardised they may not be perfectly tailored to your situation. For most investors this is fine.

There are a number of digital advice providers in the Australian market, such as InvestSmart, Stockspot and CommSec. There are a larger number talking about providing such a service, such as NAB Prosper and Ignition Wealth.

Some of the providers use digital advice as a process for generating leads to their financial advisers, such as NAB Prosper, and some use digital advice as a process for selling investment products.

InvestSmart offers digital advice as a free tool to help investors do the health check, with some easy-to-execute solutions at the end of the process. Here’s an example of how it works, based on an anonymous client’s portfolio.

Investsmart digital advice: Albert

Albert has an SMSF, in which he owns shares in three companies along with a term deposit and a cash management account (CMA) with a leading bank. The assets he owns are:

CBA $125,000
BHP $50,000
Telstra $40,000
Term deposit maturing in six months $100,000
CMA $135,000
Platinum Asia Fund $50,000
Total $500,000

Albert purchased Commonwealth Bank of Australia and Telstra in the initial public offers and government sell-downs. He bought the Platinum Asia Fund last year as he read he should have more international exposure. The term deposit was initially for three years at a rate of 6 per cent. The CMA receives all of his superannuation contributions.

Albert decides he should do an online InvestSmart portfolio health check to determine if his asset allocations are correct. Having completed the question on his investment time frame, and given he is not yet retired, he determines he is a medium-growth investor. Next he adds the portfolio to the calculator (easy to upload on a spreadsheet or by emailing the holdings) and the simulator tells him how close his portfolio is to his chosen target portfolio. In this case, Albert gets an asset allocation score of 75 per cent and a diversification score of 60 per cent, for a combined score of 68 per cent. A score ranging between 50 per cent and 84 per cent is good, but indicates he may need to review how his investments are spread across the various asset classes.

The simulator tells him which asset classes he should change to improve his overall score. In his case, moving $100,000 from cash to international equities improves his score to 86 per cent. InvestSmart can suggest how to implement that change in investments using exchange-traded funds or managed funds.

Over time, the health services you seek will change, from physiotherapy for an active youth to optometry as an older person. Likewise your portfolio should change with your age. Some of your investments will have been spectacularly successful, which can throw your allocations out of balance, so a regular health check is worthwhile.

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