Wanttogetyour investments in shape for 2021? Try our easy... 7 STEP WEALTH WORKOUT THE MONEY MAKING EXPERT
THIS month sees millions of us kick start new fitness regimes, diets and detoxes to get back into shape after a slovenly and calorific December. But while January can prove a good time to refresh our health habits, our investments can also benefit from a similar treatment. Even the best investors can profit from giving their portfolio a health check at least once a year and making sure their goals are still on track. Here are our seven steps to detox your portfolio – and get it into shape for the year ahead.
1
HOP ON THE SCALES...AND SEE WHAT NEEDS SLIMMING DOWN
FIRST, take stock of what you have in your investment portfolio and how its composition has changed over the last year. What may have been a perfectly diversified portfolio a year ago could be an out of shape one today.
Juliet Schooling Latter, research director at fund scrutineer Chelsea Financial Services, explains: ‘Hopping on the scales in the first week of the New Year is no one’s favourite task, but the January weigh-in is an opportunity to reassess more than your exercise and diet plan.
‘When was the last time you ran a health check on your portfolio?’
She adds: ‘As individual sectors, asset classes and economies perform differently over the course of a year, the value of your investments can also shift. Some holdings may have gained in value – while others may have fallen.’
Technology companies and Chinese equities performed particularly strongly last year. Therefore, if you held either, they are likely to make up a greater proportion of your portfolio than they did a year ago.
Conversely, if you invested in a number of UK companies, there is a good chance they now make up a smaller proportion of your portfolio than 12 months ago. That’s because UK equity investment funds are down 11 per cent on average over the past year.
2
CHECK YOUR INVESTMENT GOALS ARE THE SAME
AS WITH fitness, setting goals when investing is crucial for maintaining motivation, coming up with a strategy and staying focused.
Goals can change over time, so it’s worth checking them at least once a year.
For example, you may have realised you need to retire sooner than you had planned, or you have decided you would like to help loved ones financially.
If your goal has changed, you can tweak your investment strategy.
If you’re planning to retire sooner, you may want to reduce your level of risk so your portfolio doesn’t suffer market falls just before you need to start selling funds. Or, if you are managing to save more due to lockdown, you may be able to increase the amount that you are investing.
3
NOW REBALANCE YOUR PORTFOLIO
ONCE you have taken stock of what you’ve got and reassessed your investment targets, you can think about rebalancing your portfolio to get it back into shape.
If your goals are unchanged, you may want to trim holdings that have made the biggest gains so they are not making up a greater proportion of your portfolio than you’d intended.
Susannah Streeter, analyst at wealth manager Hargreaves Lansdown, says: ‘The big tech giants have seen huge share price gains in the last year. So it may be worth taking some profits if your portfolio is too tech heavy, especially given that greater regulation of the sector is looming on the horizon. Spreading your wealth also spreads your investment risk.’
4
MAKE YOUR PORTFOLIO A LEAN MACHINE
INVESTORS generally find it far easier to buy than to sell. Unless you keep watch, it’s easy to swell the number of funds in your portfolio over time with some adding little or no value.
Schooling Latter recommends scrutinising each investment fund every year and asking yourself whether it’s still worth a place in your portfolio.
She says: ‘When it comes to each individual fund, ask yourself: “Would you invest in that fund today if you were starting from scratch?” If the answer is no, it may be time to ditch it.’
5
HOW TO START YOUR NEW REGIME
SETTING a regular routine is key to investment success. Start a direct debit to your investment account to make sure you add to your portfolio every month. If you already have a direct debit in place, think about whether you can afford to increase your contributions a little bit this year.
Using your tax-free allowances and tax-friendly wrappers could be more important than ever this year, says Laith Khalaf, financial analyst at investment platform AJ Bell. He believes tax rises are pretty much guaranteed this year as the Government starts to repair the public finances.
The March Budget may deliver the first rises, depending on the pandemic’s course over the next few months. Khalaf says: ‘We don’t know where the tax rises will come, but capital gains tax looks a prime candidate for a hike. Especially after an Office for Tax Simplification report commissioned by the Chancellor recommended such a move late last year. Reducing higher rate tax relief on pensions could also be tempting for the Chancellor, though it would be fiendishly complicated to implement, not to mention deeply unpopular.’
Khalaf suggests that if taxes rise, the tax breaks offered by pensions and Isas will become even more valuable. ‘Investors should look to maximise the investments they hold within these shelters – outside the clutches of the taxman,’ he says.
6
FLUSH OUT THE TOXINS – AND GO FOR THE GOOD
INVESTMENTS with a consideration for environmental, social and governance (ESG) issues surged last year. As much as £7.8billion was put into responsible investment funds between January and October – four times more than over the same period in 2019.
Further rapid growth is likely this year as investors realise the power they have to do good with their money without compromising investment returns. It could be a great time to join the trend.
So, look under the bonnet of your holdings to see what industries you are supporting and whether that aligns with your values.
Funds should publish statements about their ESG credentials on their websites and in so-called ‘key investor information documents’ – also available online.
Emma Wall is head of investment analysis at Hargreaves Lansdown. She believes keeping an eye on ESG criteria represents good investment risk management.
She says: ‘ Even though 2020 taught us there are no guarantees, businesses that are run in a sustainable way are more likely to deliver sustainable profits and dividends to their shareholders.
‘If you haven’t begun to add ESG considerations to your portfolio, now may be a good time to do so.’
Wall suggests a global tracker fund that invests in developed stock markets, while being mindful of ESG issues, can act as the backbone of a responsible investment portfolio. She likes Legal & General Future World Developed Index.
However, before adding a new ESG fund to your portfolio, think how it will change the composition of your investments.
For example, Wall’s recommendation is focused on businesses specialising in technology, pharmaceuticals and financials – so such investments would increase your exposure to these sectors.
Adds Wall: ‘The principles of diversification remain of utmost importance when building a robust portfolio. So it is no good upping your ESG credentials only to fall foul of these rules.’
Juliet Schooling Latter points out that several funds focus on a particular environment issue.
She says: ‘There are plenty of excellent funds available that fit the bill, whether you care most passionately about stopping global warming (Ninety One Global Environment) or are concerned about climate change in general (Pictet Global Environment) or all three ESG areas are your top priority for 2021 (Edentree Amity UK).’
7
LIMBER UP FOR THE BREXIT BOUNCE-BACK
YEARS of Brexit uncertainty have weighed heavily on the UK economy and the stock market. But with a new trade deal now in place, there may be cause for optimism.
A No Deal Brexit would have knocked two per cent of growth off the UK economy this year, the Office for Budget Responsibility (OBR) had forecast.
The initial response from financial markets has been positive. Banking, travel and housebuilder shares in particular have made gains, while sterling has strengthened against the dollar. However, it will take time for the deal to bed in and the impact on all sectors to be realised in full. There are still obstacles in the road ahead.
Hargreaves Lansdown’s Streeter explains: ‘Although goods won’t be slapped with export tariffs and quotas, there will still be friction at the border with plenty of red tape to jump through. The services sector is also pretty much left out of the initial deal and further agreements will need to be made.’
The impact on investors will depend on their exposure to the UK market. While most tend to have a ‘home bias’, many will still have globally diversified portfolios with a limited exposure to UK companies.
Richard Buxton, veteran fund manager at Jupiter Asset Management, believes the trade deal with the EU is ‘undoubtedly good news for investors in the UK’. ‘Companies reliant on domestic economic activity – retailers, housebuilders, selected leisure and financial companies – should be the most direct beneficiaries,’ he says. Shares in multinational firms listed in the UK should also rise in value over time, Buxton adds, ‘as global investors once more regard the UK stock market as investable rather than a pariah of uncertainty’.