5 questions about your portfolio you should be asking

The investment world can seem complex and overwhelming. Here are a few simple questions you can ask to ensure you are on the right track.

1. Do you have more than five different investments?

If you own 10 different investments, chances are that you have overdiversified your portfolio. For example, if you own unit trusts and six different funds that invest in the South African stock market, you are almost certainly invested in a portfolio that replicates the All Share index but is costing you a lot more than an index tracker.

I have recently seen a South African balanced fund that owns more than 20 other unit trusts. Unsurprisingly, the fund costs are more than 2.5% per year and the performance has been pedestrian. Over five years, the fees have eroded more than 20% of this fund's performance. You would have been much better off with one diversified index tracker.

2. Do you own investments that you don't understand?

Warren Buffett does not buy technology companies because he does not understand them. If you own a hedge fund, or a guaranteed or structured product, do you know how it works and what it will do for you? Do you understand the risks and what your potential losses will be in the event of a market crash?

Many investors in supposedly safe hedge funds were invested in Bernie Madoff's Ponzi scheme. They had no chance of understanding the investment because of a lack of transparency and complex structures.

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3. Do you own investments you have never adjusted?

A long-term strategy is important and you should not be chopping and changing on a regular basis. If you are careful with your selections (and a little lucky) you might not have to change anything for years.

You should also be monitoring your investments regularly and you might need to tweak the balance of the portfolio. If you have split your funds into three equal parts - shares, listed property, bonds - you might need to ensure that the portfolio is still correctly balanced after, say, a big jump in the property market.

4. Can you explain why you bought each investment?

If you bought an investment because it won an award or was top of the performance rankings, you are likely to have made a mistake. Each investment should be seen as an ingredient vital to improving your portfolio. Do not realise too late that you have not had enough invested in the right assets.

5. Do you regularly add new and investments?

If you only own three different types of investments, you might have the perfect mix. Just because new products become available it does not mean you need to buy them. Product providers will always try to come up with new ideas as their job is to gather new money from investors and so they are always creating "the next big thing".

Ingram is director of Galileo Capital