Profit by giving your investments a spring clean
For many the new tax year was a rush of contributing to ISAs and sorting taxes before the year-end deadline of 5 April. But for those who want to get ahead for next year, with a bit more breathing space now the deadline has passed, it’s a great time to organise your portfolio.
Here are our top tips for getting your investments in order for the year ahead.
SELL THE LOSERS
It can be hard to admit that an investment hasn’t paid off, and that as much as you wish it it’s just not likely to rebound any time soon. It’s a classic behavioural trait that investors keep hold of their losing investments, as they can’t bear to lock in the loss.
But you have to think about it another way, what could that money have been earning if you’d sold it a year ago and invested in something else. You definitely don’t want to sell something too soon, but you need to ask yourself why the investment hasn’t gone as you’d hoped, what it will take for it to rebound and whether that’s realistic.
CHECK YOUR INVESTING STYLE?
If you look back at your investment account over the past year have you bought investments thoughtfully and regularly, or does your account look as methodical as a butterfly? If you’re not very good at keeping on top of investments and funding your ISA maybe it’s a good idea to set up regular investing.
This starts from around £25 a month with many providers and allows you to drip-feed money into the market. It also means that you avoid attempting to time the market (which even the professionals struggle to do consistently) and that you don’t pile money in at the end of the tax year.
HAS YOUR PORTFOLIO GONE OFF BALANCE?
Once a year it’s always good to look at whether your investment account still has a good spread across different assets and markets. As certain parts of your portfolio have done better than others it could mean you’ve built up a disproportionately large sum in one asset or country’s stock market.
The result of this is that your portfolio will be more heavily reliant on a few investments, which in turn increases the risk in your investment pot. It can feel counterintuitive to sell the stocks that have risen and buy more of the ones that have fallen, but that’s the theory you should be sticking to, so long as you still have belief in the under-performing assets.
WHAT’S IN YOUR PIGGY BANK?
Investors are nervous at the moment, and we’ve seen big outflows from a number of funds, particularly from UK and Europe assets amid the Brexit uncertainty. This means that you might have more money in cash than usual. There’s nothing wrong with this, so long as it’s a considered decision not driven by panic. Inflation is currently higher than the measly amount paid by most cash savings accounts, meaning any money sitting in easy-access accounts will be losing spending power – so it’s not a free option.
Instead you need to work out how much cash you’re happy with (there’s a handy guide here) and then look to invest the rest.
DO YOU STILL BELIEVE IN YOUR FUND MANAGERS?
There’s nothing wrong with a fund manager underperforming over a short period of time, so long as it’s in line with their investment strategy and you understand why.
But you need to check in with your funds once a year or so to check they’re still performing as you’d want them to.
It’s very difficult as an investor to work out when a fund manager is having a short-term bad run, where their style is out of favour for example, or when they have made bad decisions that will affect your investment returns.
You need to put in the research to check they are still investing to their guidelines, see why they went wrong in the past year and what their views are. Many investors won’t feel they can contact the fund houses themselves, but you should if you have any questions or can’t find the vital information you need.
CAN I GET IT CHEAPER?
This is a good test for all areas of your finances, but particularly investments. You should check if you can get the same thing, at the same quality for a lower cost. This is probably simplest in the ETF or index tracker space, where it’s much easier to compare one FTSE 100 tracker to another, for example, and then see which is cheaper.
The effect of charges can really eat away at your investment pot over the long term. For example, a £10,000 investment growing at 5% a year with annual charges of 0.5% would be worth £15,530 after 10 years, but if your annual charges were 1% a year that amount would be £14,802 – £728 lower. There’s no problem with paying more for better quality or features you need, but make sure you’re not paying extra for services you don’t need.
It’s trickier with fund managers, but if you’re paying a lot for a particular fund you should first see if there’s a cheaper share class you can buy. If not you should see if you can find another manager with a similar pedigree and style who could do the job for less.