Your mid-year portfolio check-up in five easy steps

Morningstar’s Christine Benz & Holly Cook outline a disciplined process to help you tune out the scary news flow.

It may come as something of a surprise to discover that we're already halfway through 2011. Not a lot has changed in the first six months of the year: interest rates remain at historic lows with little sign of an imminent hike; Greece and eurozone sovereign debt continue to dominate the headlines; the range-bound FTSE tests 6,000 every now and then but fails to hold on.

But despite the malaise in the stock market, your portfolio may well have undergone several shifts in this time period, which is why now is a good time to conduct a mid-year portfolio review.

A bi-annual check-up might sound too infrequent to some. But if you're paying attention to the news flow and checking in on your portfolio holdings every day--or worse yet, throughout the day--you may be tempted to trade more than needed.

In turn, you may run up high tax and transaction costs, and you're also more likely to chase whatever's been hot recently in the hope that it will continue to outperform. What a terrible way to invest.

A better, and certainly lower-stress, way to operate is to put in place a disciplined process for checking up on your investments--ideally just once or twice a year or every quarter at most. The lynchpin of such a hands-off portfolio-management programme is a well-articulated investment policy statement that spells out how often you'll check up on your holdings and what you'll be looking for when you do. (Find out more about creating your IPS and download our IPS worksheet here.)

If you don't have an investment policy statement but want to conduct an efficient and effective portfolio review, you'll want to concentrate on four key elements: your asset allocation versus your targets, fundamentals (whether there have been any notable operational changes at your holdings), performance, and taxes.

Observe the following five steps as you conduct a review of your portfolio. Take notes as you go along because you'll want to refer to them as you decide whether to take action.

1. Check Up On Your Asset Mix

One of the most important determinants of whether your portfolio is positioned to meet your goals is your asset allocation--how much you hold in stocks, bonds, and cash.

In our Portfolio Manager tool, free to all users of Morningstar.co.uk, enter a ticker for each of your holdings (don't forget company shares and cash), along with the pound value for that holding, then click Show Instant X-Ray. You'll see a range of tables and charts depicting how much you have in each of the major asset classes, which you can then compare with your target allocations.

But what if you don't know how much you should have in stocks (domestic and foreign), bonds, and cash? If that's the case, check out this previous article on finding the right stock/bond mix for you.

Once you've assessed your portfolio's asset allocation, turn your attention to how your stock and bond holdings are positioned. Within Instant X-Ray, you can see stock and bond Morningstar Style Boxes (two nine-square grids in the upper right-hand corner of the X-Ray page) that depict the investment styles of your holdings.

Although you shouldn't expect to see an even distribution of holdings in each of the nine squares, you do want to take note if the majority of your holdings are huddled in only one or two regions of the style box.

Instant X-Ray also shows you how your stock holdings are dispersed across various market sectors as well as how that positioning compares with your chosen benchmark.

As with style-box positioning, you shouldn't get too worked up about some divergences, but you do want to take note of very big bets--sectors where your weighting is more than twice that of the index, for example.

Finally, pay special attention to whether your portfolio is disproportionately skewed towards one or two individual share holdings, for example, if your employer pays you partly in company stock you could find that this is hogging a share of your portfolio. (As a general rule of thumb, company stock should take up less than 10% of your total holdings.)