How to spring clean your investments

In the wake of the new tax year, a bit of portfolio spring cleaning is an annual ritual for some. The new tax year brings with it fresh pension and ISA allowances and so minds are already attuned to investments and financial goals.

Not everybody will spare a thought for their investments this spring, but they probably should. Even the most considered portfolios still need regular reviews to keep them on course, and to account for any changes in your circumstances that might call for a different tack.

There’s no need to make changes simply for the sake of it, but equally you might find a few holdings in your portfolio that leave you scratching your head as to why they’re there. Everyone will approach a portfolio review slightly differently, but if you’re searching for a bit of structure, you can cover a lot of bases by focusing on six questions.

1. Has your personal situation changed?

Probably the most important thing to assess is whether there have been any material changes in your personal situation. Getting married, having a child, or buying a bigger house can have an impact on your finances, such as your life insurance requirements and the need to update your will.

But life events might also affect how much risk you’re willing to take with your investment portfolio. Perhaps you’ve come into an inheritance which means you feel more comfortable dialling up your investment risk, because your financial security has increased. Or maybe you now plan to retire earlier and draw on your pension, so it might be a good time to reduce the volatility of your portfolio. Consider what, if anything, has changed personally, how this might affect your attitude to risk, and whether your portfolio is still a good match.

2. Has your portfolio become bent out of shape?

Market prices aren’t static, and as a result, neither is the shape of your portfolio. Over short periods this won’t make much difference, but given time, the equilibrium in your portfolio can be lost as some bits move up faster than others and may mean your portfolio becomes too reliant on one fund or one region. Regular rebalancing is therefore an important discipline to keep your portfolio in good order.

As a simple example, consider a portfolio that was 50% invested in the UK stock market and 50% invested in the US stock market five years ago. Today, if left untouched, that portfolio would be approximately 60% invested in the US and around 40% invested in the UK, because the former has performed so much better than the latter. After a review you might conclude you’re happy with the current split, but at least you would have made a considered decision, rather than simply letting the balance in your portfolio be dictated by market movements.

As well as the regional split of your portfolio, you should give some consideration to the allocation across asset classes (if you aren’t fully invested in shares). That means taking a look at your exposure to shares, bonds, property, cash, gold and any other assets you might hold. This is all easier than it might sound at first, as many investment platforms will offer you an online tool that breaks down your accounts by region and asset class. You should also check whether any specific funds you hold have done a lot better than others and now constitute a large part of your overall pie. That’s clearly a good sign, but it’s worth making sure that your portfolio isn’t too heavily reliant on just one fund manager, no matter how good they are, because even the very best can go off the boil.

3. Have you got any poor performers?

You should also check your portfolio for any serially poor active funds. These are not funds that have had a bad year, or where their investment style is out of favour, but rather funds that have consistently lagged behind competitors for a long period and show little sign of change for the better. You should consider replacing fund duds with more promising active funds, or cheaper tracker funds. The latter won’t outperform, but at least they aren’t charging the higher fees associated with active management for the privilege.

4. Is the investment case still solid?

As well as inspecting performance, it’s worth checking that the fundamental reasons you bought an investment are still in place. For funds and investment trusts, make sure there hasn’t been a change in fund manager or strategy, and if there has, consider whether it’s still fit for purpose. If you invest in individual shares in your portfolio, consider if the reason you bought into a company has now run its course, or has still got some legs. Also consider if the business has undergone a material change in strategy or circumstances which make it a less attractive investment proposition.

5. Have any new ideas or opportunities cropped up?

A portfolio review is a decent time to scout around for new investment ideas, which might replace funds or stocks you’re selling. Are there any emerging trends you might want to buy into? Or are there any fund managers who have impressed you with performance, and now merit inclusion in a portfolio, or perhaps a bigger share of your assets? One thing which has changed over the past couple of years is a big fall in bond prices and a rise in yields. Those who have shunned bonds as part of the diversification in their portfolio, preferring instead perhaps property, gold, cash, or absolute return funds, might pause to give thought to whether bonds should be back on the menu.

6. How can I reduce my tax bill?

A vital piece of the jigsaw is to make sure your portfolio is invested as tax efficiently as possible. The sooner you put your investments inside a tax wrapper like an ISA or pension, the sooner the tax protection kicks in. This year tax planning feels particularly relevant, because the capital gains tax allowance has been cut from £6,000 to £3,000, after being cut from £12,300 in April 2023. Gains above this level on investments not held in a tax shelter are potentially liable to tax.

The dividend allowance has also been cut again from £1,000 to £500, after being reduced from £2,000 in April 2023. Again, dividends received above this level are taxable if not held in a tax shelter. In an election year more tax cuts might be brewing, but the reductions to these allowances were introduced relatively recently, so it would be surprising to see them reversed. In any case, it’s far simpler to protect yourself from tax on your investments using pensions and ISAs rather than hoping for a Hail Mary from the chancellor.