Are you Financially Fit? A 10-Step Annual Health Check for Your Portfolio
Simon Turner
Mon 11 May 2026 8 minutesThere’s a persistent misconception among investors that portfolio construction is a set-and-forget exercise. But much like physical health, financial fitness depends on consistent, disciplined work. This is because portfolios drift, risks evolve, and market conditions change.
Here’s a 10-step annual financial health check designed to keep your finances in tip-top shape:
If you don’t have an asset allocation plan, write one out that covers your goals, your risk appetite, your time horizon, and your personal circumstances. The more thought, the better.
If you’re struggling to create a functional plan, consult a financial adviser (or AI).
If you do have an investment plan, make sure it’s up-to-date.
Check your asset allocation plan and compare it with your current portfolio.
Identify all differences, particularly significant ones.
- Make the time to rebalance your portfolio back to your asset allocation plan annually.
During your annual review, ask yourself whether you are optimising the benefits of diversification by asset class, region, sector, and thematic.
Assess not just the number of holdings in your portfolio, but the underlying drivers of risk.
Reframe risk as the potential to revisit the historic worst-case scenarios across the asset classes within your asset allocation plan.
Through this process, start thinking more in terms of expected returns versus the worst-case scenario returns.
By thinking in terms of risk-adjusted returns, you’ll be better positioned to ensure your portfolio is genuinely prepared for future bear markets.
Consider fund and ETF fees in your review.
Where appropriate, allocate to funds and ETFs that align with your long-term goals while charging competitive fees.
However, make sure you’re not prioritising costs above fundamental portfolio management issues such as optimising your risk-adjusted returns through alpha-generating funds.
During your annual review, reassess whether your portfolio’s income profile remains aligned with your objectives.
Make sure you emphasise the importance of income in allowing you to regularly reinvest and thus compound your returns.
Reinvestment depends on taking regular action. Consider automating this to make it as easy as possible.
Stress-test your portfolio to gauge the accessibility of your capital under stress scenarios.
As a general rule, it’s safest to assume that the capital invested in illiquid asset classes will be inaccessible during periods of market volatility.
Whether to hedge or not should be revisited periodically as part of a comprehensive review.
In general, you’ll want to hedge if you believe the currency you’re investing in is likely to weaken against the Aussie dollar, and you won’t if you have the contrary view.
Take action where appropriate.
Step back and consider your own role as an investor. Are you remaining proactive and aligned with your investment plan? Or are you reactive and thus destroying value in the process?
Make notes on how you are behaving and how you can improve.
Consider financial coaching or advice to keep you accountable to your plan.
1. Asset allocation: Have you got a thought-out plan that aligns with your personal goals and circumstances?
The starting point is an asset allocation plan.
Decades of empirical research, beginning with the seminal Brinson, Hood and Beebower study, have shown that asset allocation explains the vast majority of portfolio return variability over time.
More recent analysis supports the conclusion that asset allocation remains the dominant driver of outcomes, far outweighing security selection or market timing.
Action points:
2. Portfolio drift: Check it annually
Next, check for portfolio drift.
If your allocation has drifted away from its planned asset allocation structure, your portfolio may be taking on more risk than you realise.
Drift is inevitable. Strong equity markets over the past decade have led to a material increase in equity weightings across investor portfolios globally, increasing exposure to drawdowns at precisely the wrong time.
An annual review provides the opportunity to assess whether your current allocation still aligns with your objectives, time horizon and risk tolerance.
Action points:
3. Rebalancing: Make it an annual ritual
Rebalancing is the way to address portfolio drift.
It’s often misunderstood as a purely defensive exercise, but it has measurable benefits.
It represents an optimal balance between risk control and transaction costs, with a risk-adjusted benefit equivalent to 0.5% p.a., as shown below.
An annual rebalance consistently demonstrates the best risk-adjusted returns for most investors.
Alternatively, it can be conducted on an event-driven basis; whenever a portfolio drifts significantly from plan.
Separate analysis shows that rebalanced portfolios tend to experience smaller drawdowns during periods of market stress, thus preserving capital and enabling more effective participation in recoveries.
Action point:
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4. Diversification: Are you optimising its benefits?
Diversification, often described as the only free lunch in finance, remains another critical pillar of portfolio health, yet it is frequently misunderstood.
True diversification is not simply about holding multiple assets.
It’s about combining exposures that behave differently under varying economic conditions.
Vanguard’s research emphasises that a well-diversified portfolio, constructed across asset classes and geographies, provides a more resilient return profile over time by reducing reliance on any single source of return.
For Australian investors, this has particular relevance given the concentration of the domestic equity market in financials and resources.
Action points:
5. Risk management: Time to focus
Risk itself is often mismeasured.
Volatility is the most commonly cited metric, yet it’s an incomplete proxy for the risks that really matter to investors.
A more meaningful approach considers the probability of failing to meet long-term objectives. This is where alignment between portfolio structure and investor goals becomes critical.
On that note, history doesn’t tend to repeat, but it does tend to rhyme. Using historic data (as per below), it’s important to match your asset allocation plan to both your risk tolerance and capacity to absorb losses.
Remember: a portfolio that is theoretically optimal but behaviourally unsustainable is unlikely to deliver its intended outcome.
Action points:
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6. Costs: Worthy of attention
Costs, while important, should be assessed in context.
The fund management industry’s focus on reducing fees has delivered significant benefits to investors, particularly through the growth of low-cost ETFs.
However, the marginal gains from cost reduction may be outweighed by structural inefficiencies within a portfolio.
Tax leakage, for example, can have a substantial impact on after-tax returns. Rebalancing decisions, particularly in taxable accounts, should therefore consider capital gains implications and the potential use of offsetting losses.
Action points:
7. Income generation: The engine of compounding
Income generation is another portfolio dimension that warrants annual scrutiny, particularly in the current environment.
Rising bond yields have altered the relative attractiveness of fixed income, with yields in global bond markets reaching levels not seen in over a decade.
As a result, Vanguard’s recent outlook suggests that higher bond yields may justify a greater allocation to fixed income within certain portfolios, depending on individual circumstances.
Action points:
8. Liquidity: More important than most investors realise
Liquidity is an often overlooked but critical aspect of portfolio health.
The events of recent years, including the COVID-19 market shock, have highlighted the importance of maintaining sufficient liquidity to ensure you aren’t forced to sell assets at the wrong moment.
This is particularly relevant for investors holding less liquid exposures, such as unlisted funds.
Action points:
9. Currency: A bigger contributor than many investors assume
For Australian investors, global diversification introduces currency risk, which can either amplify or dampen returns, depending on market conditions.
Research suggests that, over the long term, currency exposure primarily adds volatility rather than return, making it a key consideration in portfolio construction decisions.
Action points:
10. Master your emotions: Look in the mirror
The discipline of regular review also serves a behavioural function.
Structured, rules-based processes reduce the likelihood of reactive decision-making, the bane of positive investment outcomes.
By embedding rebalancing and allocation adjustments within a predefined framework, investors can mitigate the impact of short-term market noise.
Action points:
Financial Fitness Takes Regular Effort
Ultimately, financial fitness is about ensuring that your portfolio remains aligned with its intended purpose. Investors who maintain a disciplined, evidence-based review process are better positioned to manage risk, capture returns, and achieve their objectives.
Markets will change, valuations will fluctuate, and new opportunities will emerge. A disciplined annual health check ensures that the portfolio evolves with them, rather than drifting away from its intended path.
Disclaimer: This article is prepared by Simon Turner. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.
Simon Turner is an ex-fund manager with 20 years investing experience gained at Bluecrest, Kempen and Singer & Friedlander who now writes educational content about investing and sustainability. He's also the published author of The Connection Game and Secrets of a River Swimmer.
