How to perform a portfolio audit?

A reader asks, “How to perform a portfolio audit? What are the steps?
What should be the frequency? How to achieve it without impacting your core day-to-day job/business? Ideally, how many goal-based portfolios an individual should have at max?”

A portfolio audit comes after proper goal-based financial planning and implementation of the plan. We recommend using the Free ebook: Re-assemble – Step by Step money management basics to ensure the basics are in place and the freefincal robo advisory tool to create a complete financial plan. Then, you can Review and track your goal-based investment portfolio with this auditing tool.

So for each goal, you must have clear answers to the following:

1. When do I need the money?
2. What is the anticipated inflation?
3. How much should I invest to get to the target corpus?
4. What should be my initial asset allocation?
5. How am I going to vary this asset allocation to manage risk?
6. Which products should I invest in each asset class?

Then and only then a portfolio audit makes sense. So what do we do in a goal-based portfolio audit? Answer the following questions once a year. It will only take about 30 mins. So it will not affect your work or leisure!

1. Did we invest enough for all our goals? If not, note the shortfall and resolve it in the coming months. Also, see 11 years of tracking investments: A life and game changer. What is the plan for the next 12 months? What is the new investment amount target? We recommend se
2. What is the current corpus worth for each goal? If you were to spend it now for the intended purpose, how much of the expense would it cover? For a goal like a child’s college expense, the answer will be: “I can cover 25% of the cost today”. For a goal like retirement would be, “If I retire today, I can be financially independent for the next seven years”. For more details, see: How to audit your financial freedom portfolio.
3. What are the current asset allocations for each goal? Do I need to rebalance (re-set asset allocation)? Do I need to de-risk (reduce equity allocation)?
4. These are the most important questions; if you can answer them well, your audit is done.
5. You also look at the XIRR of each asset class and individual funds. As long as there is nothing terribly wrong, you don’t need to be in a hurry to react. Our stock and MF track on Google Sheets can be considered for this purpose. It also has an in-built basic goal planner that will auto-update with current portfolio holdings. This can be used to approximately determine if the investment needed each month is reducing – a sign that your portfolio is growing.

Do not worry too much about overall returns and individual fund or stock returns. If you hold index funds, you don’t need to worry about fund performance. If you are holding active funds and your portfolio is still young, you can switch to index investing. You can use our mutual fund portfolio tracker and visualization tool to benchmark your portfolio and take call on your active holding, but this is not a priority.

Finally, one can have any number of goal-based portfolios. Alternatively, we can use a unified portfolio approach. However,  we recommend separate portfolios for separate goals. At the very least, one should not combine long-term and short-term goals in a unified approach.