The Scottish Mail on Sunday
4 tactics to help keep your investment portfolio on track
Don’t let the shockwaves from the Election result unbalance your finances... here’s our essential guide
ALTHOUGH Friday’s General Election result did not shock markets into a freefall (see panel, right), any major political or economic event is a good excuse to check up on your investments.
Experts preach the importance of investing for the long term, picking your investment funds and shares and leaving your money where it is. But it is equally important to check in occasionally to see how your investments are progressing and whether any fine tuning is necessary.
Here are four issues investors should consider in making their investment portfolios fit for purpose.
JUST because you invested some money, it does not mean you cannot add more. Investing money in small, regular amounts has been proven time and again to be more effective than investing a large lump sum all in one go.
Not only is putting a regular amount aside each month easier on the purse strings, it is a safer way to invest too. This is because savers who take this approach benefit from something the professionals call ‘pound-cost averaging’ when markets are turbulent.
It means that over time you end up buying more units in your investment funds when prices are low and fewer when prices are high, so you benefit over the long term. Figures from investment house Fidelity show that someone who invested their annual tax-free Isa allowance in regular monthly instalments over the past ten years would have made £6,000 more than someone who invested the whole lot on the last day of each tax year.
In both cases, if they used their Isa allowance fully over the past ten tax years, they would have invested a total of £110,560.
If they had invested each year’s allowance into the FTSE All-Share Index in one lump sum on April 5 each year, their Isa pot would have grown to a tad over £158,500. But someone who invested the same sum but spread over the year via monthly payments would have seen their investments grow to just over £164,500.
Lump-sum investing runs the risk that the stock market could fall the next day after an investment has been made, taking your savings with it. Setting up a regular payment takes the emotion out of investing.
Jason Hollands is managing director of financial adviser Tilney. He says: ‘What happens is that when the stock market is soaring, investors become bold, they invest more and start taking risks. Then when the market falls they panic sell, when really that is the time to invest more because share prices are cheaper.
‘Regular investing instils a great discipline to keep on investing, through both good times and bad, when your instincts might tell you otherwise.’
You can set up a regular investing account through any fund supermarket, such as Hargreaves Lansdown, Fidelity or Tilney Bestinvest. You can invest as little as £25 a month into a choice of investment funds, investment trusts or low-cost exchange traded funds.
USE YOUR ALLOWANCES
THE Government still encourages people to save long term. This is done by providing tax relief on contributions into pensions and enabling investors to build tax-free investment inside an Individual Savings Account.
Whenever you start investing or decide to top up your investments, your first port of call should be to utilise these tax-free allowances.
In the current tax year, which runs from April 6, 2017 to April 5, 2018, savers can put as much as £20,000 into an Isa. They can also make annual contributions into a pension up to £40,000 – although this limit also includes any employer contribution.
Besides pensions and Isas, there are other incentives to encourage long-term saving. Investors have an annual capital gains tax allowance of up to £11,300, which means profits on any share sales up to this limit are tax-free. Also, investors currently enjoy an annual tax-free dividend allowance of £5,000.
Tom Becket, chief investment officer at Psigma Investment Management, says: ‘As an investor, it is absolutely vital to take advantage of your Isa, Junior Isa and your Lifetime Isa allowance, as well as your pension allowance every year.
‘Saving money into these taxfriendly vehicles is increasingly important as more people are going to have to stand on their own two feet in retirement in the future.’
REBALANCE YOUR PORTFOLIO
IT SOUNDS like a complicated investment term, but all rebalancing means is checking to make sure your investment portfolio is progressing as you want it to.
When you start investing you might have, for example, 50 per cent of your money in stocks and shares and 50 per cent in bonds.
But if the stock market plunges and bond prices rise, the value of your investments will change and it will alter those proportions. Without having made any changes to your investments you might now have 30 per cent of your money in shares and 70 per cent in bonds.
So investors should be sure to check their portfolio, just once or twice a year, to make sure they are still happy with it and to check whether any rebalancing is necessary.
Maike Currie is investment director at Fidelity. She says: ‘Once your pension or Isa is set up you should not just ignore it. Personally, I try to revisit my investments perhaps every six months to a year to check they are still in line with my goals and the amount of investment risk I want to take.’
But rebalancing can be difficult. It may mean taking money out of investment funds that are doing well and putting more into those which have not performed so impressively.
But being disciplined and sticking to such a strategy will get you an extra boost in the same way that regular saving does. You are in effect
taking profits from investments when they are expensive and buying alternative funds or shares when they are cheap.
As you get older it is also advisable to consider changing your mix of investments, taking money out of riskier funds into safer ones or those which pay a regular income.
Psigma’s Becket has been taking money out of Japan recently. He says: ‘I had invested 4 per cent of my own portfolio in Japan, but over the past four months the Japanese stock market has risen 20 per cent, so the proportion of my money in the country’s stock market had increased to 5 per cent.
‘So I have taken some profit to get back to the original 4 per cent I had invested in the region.’
Research by Fidelity shows that if you had invested £1,000 in 13 different assets, including gold, UK shares and corporate bonds for example, and left your money alone for 20 years you would now have a portfolio worth just short of £53,000. But if you had rebalanced your holdings every year to equal levels again your money would have grown to nearly £58,000.
Fidelity’s Currie invested in a US tracker fund in December 2015, which has risen almost 50 per cent since then.
She says: ‘As a result, the proportion of my savings which are in the US has been skewed so I am going to take some profits and put them into my gold investment fund.
‘I am concerned about rising inflation in the UK and gold is a good shelter against both inflation and uncertainty.’
4 VALUE FOR MONEY
JUST as you shop around to make sure you are getting good value for money on your groceries or a new TV, you should be sure to check that you do not pay over the odds when buying funds or holding them on an investment platform.
When picking an investment fund, check how its performance and charges compare with competiuty tors. The most important figure is the ‘ongoing charge’, which is detailed on the monthly factsheet issued by the investment house behind the fund. This is expressed as a percentage and shows how much the fund charges to pay for everything from the manager’s salary to the cost of buying and selling shares. So, if you have £10,000 in a fund which charges 1 per cent, annual costs equate to £100. But while cost is important, it should not be the only issue an investor focuses on. Richard Champion, dep- chief investment officer at Canaccord Genuity, says: ‘There is nothing wrong with paying a little bit more for a fund with a proven track record for delivering good returns.’
He avoids any investment funds where the manager receives a performance fee, as these can incentivise them to not invest for the long term and can eat into investment returns.
Psigma’s Becket says: ‘If a fund manager goes out to replicate the performance of the FTSE 100 Index, then you might as well just buy a low-cost tracker fund.
‘But paying for active investment management can be worthwhile if you are investing in a particular specialist theme – such as technology – or region, such as emerging markets.’