A checklist for analyzing your portfolio

You just created your portfolio and you would like to get a second opinion: Did I miss something? How can I improve it? Should I make any changes? You may be wondering.

Below is a checklist of things I pay attention to whenever looking at other portfolios. These reflect the preferences I have therefore you should look at them as “things to consider” rather than as “rules for all portfolios”. Different people, have different needs and different preferences therefore it is normal to deviate from the points outlined here. What is important is that you make sure any deviations happen intentionally instead of accidentally.

Distribution policy

Have you picked funds with the distribution policy most beneficial for your country of residence (i.e. accumulating vs. distributing)?

Depending on your country of residence, choosing a fund with an appropriate distribution policy is a way to increase your returns.

Some funds may only exist with a policy other than your preferred. Or you might have access to a limited amount of funds. It is fair to diverge from the ideal scenario in such cases.

Fees

Are there other good funds for your desired asset classes but lower fees (e.g. TER)? Are there other good funds for your desired asset class with lower transaction costs in your broker?

The cheapest fund might not always be the best choice. But it is always worth knowing if there are reasonable cheaper alternatives. This has a direct impact on your returns.

Number of companies in the index

Does the tracked (equity) index contain more than 500 companies?

Indexes like the EURO STOXX 50 are not diversified enough in my opinion. More diversification mitigates the risk of a few companies having a significant negative effect on your portfolio. I am setting 500 as the minimum of companies because of the S&P 500 index which is pretty popular and is a benchmark for the US market even though it does not track thousands of companies.

Global diversification

Does your portfolio invest in assets across different geographies weighted by market cap?

I prefer globally diversified portfolios because they allow you to be exposed to the returns of different countries – we don’t know if the countries that did well in the past will also do well in the future. Global portfolios also mitigate the risk of a crisis in a few countries having a significant impact on your returns.

Overlap

Do you have multiple funds covering the same assets?

If you have the a S&P 500 fund (US equities) and a MSCI World fund (developed world equities) in your portfolio then you have overlap because the MSCI World fund invests in assets in which the S&P 500 fund invests.

Buying multiple funds that invest in the same assets does not provide you with additional diversification. You should avoid overlapping funds. The only scenario where overlaps are useful is if you intentionally want to have different geographic weightings than the original weightings from the global fund.

Simplicity

Is your portfolio needlessly complicated? Does it have more than 3 funds?

There are many portfolios out there with 6+ funds. I think you don’t need more than 2-3 funds to have a good portfolio, specially when starting out. Having more funds leads to more money spent on transaction fees, more time spent rebalancing your portfolio, more work managing your portfolio.

Asset allocation

Is your fixed/equity split in line with your risk profile?

Fixed income helps reduce the volatility in your portfolio and your capital losses during a market decline. You may have to consider alternatives of fixed income (other than bonds) given the current low interest rate landscape. This is one of the most important investment decisions you’ll make.

Bond funds currency

Are your bond funds denominated in your local currency or currency hedged to your local currency?

You should hold bond funds in your local currency because bonds have low volatility and currency fluctuations would increase the volatility of your returns.

Domicile

Are your funds domiciled in Europe?

US domiciled funds are not only harder to buy due to MiFID and PRIIPs regulations but also have some potential tax traps.

Ireland is my preferred domicile because it has a tax treaty with the US for a 15% dividend withholding tax rate, it does not withhold taxes for non-Irish residents and it insulates me from US estate taxes.

Sector ETFs

Do you have any sector (e.g. technology, dividend companies) in your portfolio?

I don’t think you need sector ETFs to have a good portfolio. Total market ETFs are good enough since they already include all sectors with the proper weights and we don’t know what the future will hold. An exception to this would be small value stocks which historically have remarkable returns but are very volatile.