Laura Suter, personal finance analyst at investment platform AJ Bell, comments:
“This is a year that few investors will look back fondly on, with all major markets either falling or sitting flat over the year. Any investors logging in to their investment account for the first time in a while need to steady themselves for what they may see.
“Many aren’t feeling optimistic about their fortunes next year either, with almost a quarter of people not feeling confident about the outlook for their investment portfolio in 2019. However, that hasn’t deterred investors from markets, with more than a third of people planning to increase the amount they invest next year, compared to 2018, and almost half planning to invest the same amount in 2019 as they did this year*.
“As the New Year rushes towards us, investors should take the chance to review their portfolio and make sure everything is working as it should. Only a fool would think that they can accurately time the market highs and lows consistently, so instead they should make sure they don’t own any duds and come up with a strategy for 2019.”
Portfolio Checklist:
1. Is you fund manager creeping?
“Buying funds isn’t a hands-off process and you need to check-up on your fund manager to make sure they’re doing what they said they would. When markets are falling it’s tempting for fund managers to deviate from their investment strategy in order to chase higher returns. In the same way that you don’t go to the fishmongers for a great cut of beef, you bought the manager for their expertise in a particular area, so any move away from that should be a warning signal.”
Action: Check the holdings of the fund match what the manager said they’d be doing. If it’s a large-cap fund and they’re investing in lots of small companies, that should ring alarm bells, for example.
2. Make use of tax-free allowances
“If you’ve made great returns on your investments, you don’t want a chunk of your gains eaten up by tax if you can avoid it. Each person gets an ISA allowance of £20,000 each, while most people have an annual limit of £40,000 that they can put in their pensions as long as they have earnings to match.
“Additionally, anyone cashing in gains this year has a £11,700 tax-free allowance and investors should also make sure they offset any losses against their gains or make use of transfers to their spouse. If your spouse has losses they can offset or is a lower-rate taxpayer, you can save money by transferring the assets and then realising the gain.”
Action: Check whether you’ve got any ISA or pension allowances left to use, and check before cashing in gains.
3. Have your outgrown your investments?
“Many people will have started investing decades ago and not changed their strategy during that time. You need to be careful that you’ve not got the portfolio of a 30-year-old while you’re a 60-year-old.
“First, you need to know what you’re aiming for. Investing without setting a goal is like going for a drive without a destination in mind. When you have an objective it’s easier to figure out how much risk you can take and which assets might be suitable.”
Action: Ask yourself what you’re investing for and how far away that goal is. Check the risk in your portfolio matches your current risk level.
4. Is the underperformance justified?
“If your investments have underperformed, do you understand why? This is particularly important when investing via funds. Every fund manager will go through periods of underperformance, but is it because their sector or investment style is out of favour, or something more specific to the manager? When you buy a fund you need to know in what market conditions they will likely outperform and when they will lag the market. On the flip side, knowing this helps you to weed out when a manager has made a series of bad calls and may have lost their edge.”
Action: Look at the funds that have underperformed, work out whether it’s down to markets or the manager.
5. Has an investment become too big?
“You might have bought a fund when it was a minnow, but through good performance and attracting more money from investors it’s ballooned into a giant fund. That’s fine in theory, but every fund has a limit, after which it becomes harder for them to stick to their investment style and keep finding good investments. There is no golden rule on size, as it depends where the fund is investing. A FTSE 100-focused fund, for example, will have a larger limit than something investing in small UK companies or niche areas, such as pharmaceuticals.”
Action: Check if you fund has grown dramatically in the past couple of years, and see if the fund manager has previously said what their limit would be. Check if any funds that have ballooned in size have started investing outside their comfort zone.
6. Is it time to rebalance?
“Rebalancing your investments is so important after a year like this, where some investments have risen dramatically and others have fallen with equal force. 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.”
Action: Work out what you want your ideal portfolio split to be, between assets and countries, and see how close you are to it. Regular investors can just re-direct new money to certain investments to rebalance.
7. Have you been haphazard? Set up regular investing
“Over the past year have you invested in fits and bursts, as you’ve logged in to your account and realised you haven’t paid in for a while? Are you also someone who puts money in their ISA on the final day of the tax year, to use up your annual allowance? If so, you might be better off setting up a regular investment, which pays money in and invests in monthly.
“This 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.”
Action: Look at whether you can set up regular investments on your platform, or failing that, set up a direct debit into your investment account and a reminder in your calendar to invest the money.
8. Switch to the cheapest version of your fund
“Even the professionals in the industry can struggle to decipher the broad array of different share classes available for each fund. Each share class will access the same fund, run by the same manager, but will just have a different annual charge or will determine whether any income is paid out or automatically reinvested. Typically older versions of a fund will charge investors more – so check if there is a cheaper option of the same fund available.
“In particular check passive investments, as the average fees on tracker funds have been slashed in recent years, meaning you could get the same product at half the price. For example, you can get a good quality FTSE 100 tracker for just 0.06%.”
Action: Check whether cheaper share classes of your fund are available, particularly for holdings you’ve had for a while. See if a cheaper passive product is on offer.
9. How much cash do you have?
“Recent market wobbles mean some people have upped their cash levels for fear of a crash. 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.
“You should have enough cash to cover an emergency, between three and six months’ of expenditure, and enough to cover any short-term spending plans, such as a big holiday or a new car. After that you need to think about why you are holding cash, when you would be comfortable investing it and work out the returns (or lack of) that you will get from it.”
Action: Work out how much short-term cash you need, then look at how much you want in your investment account, and in what situation you would put that into the market.
*Based on research of 700 AJ Bell Youinvest customers.
