9th December 2014
As we near the end of 2014 and the financial forecasters begin to pen their predictions for what will happen to the markets next year, it is a good time to reflect on what you might like to do differently as an investor.
While joining the gym and drinking less might be top of your list of New Year’s resolutions, Hargreaves Lansdown’s senior analyst Laith Khalaf has some ideas for behavioural changes that might be a bit easier to achieve and should help to get your investment portfolio in better shape.
1. Choose properly active or properly passive funds
Too many funds are closet trackers which charge fees for active management but provide an index-like return. This phenomenon is particularly prevalent amongst pension funds which hold billions of pounds of investors’ retirement savings.
Investors should rid their portfolio of this deadwood, and replace these funds either with proper index trackers at a fraction of the price, or a truly active fund run by a talented and proven fund manager. It is absurd that some investors are paying more to invest in closet trackers than they would to invest with one of the UK’s foremost fund managers like Neil Woodford.
2. Match your investments to your tax shelters
Putting your investments into a SIPP and an ISA can make significant savings on income tax and capital gains tax for you. A pension like a SIPP is by its nature a long term investment for most investors and so, counter-intuitively, should include your riskiest investments as you have the longest investment horizon to ride the ups and downs.
There is also some sense to sheltering income-producing assets in your pension and ISA before growth assets. This is because capital gains tax can be avoided if your profits are less than £11,000 a year. Meanwhile when it comes to income, a SIPP or ISA protects basic rate taxpayers from paying 20% income tax on interest payments, and protects higher rate taxpayers from paying 40% tax on interest payments and 22.5% tax on dividend payments. Additional rate taxpayers are protected from 45% tax on interest payments and 27.5% tax on dividend payments.
3. Consider whether you are taking enough risk
Many investors question whether they are taking too much risk, but few ask if they are taking enough risk. Risk and return are related and taking less risk is fine if that suits you, but it is likely to lead to lower returns over the long term, which may make your savings goals less attainable. There are two ways to counter this: take more risk if you feel you can stomach the ups and downs, or save more each month while maintaining a lower risk portfolio.
4. Conduct an annual portfolio review
All investors should review their portfolio at least once a year. This way there are no nasty surprises waiting for you when you finally come to cash in your investments. Investors should keep an eye on how their funds are performing and weed out any serial underperformers. They should also make sure they are on course to meet their savings goals, if not they may have to top up along the way, because investment markets don’t ever go up in straight lines. Finally investors need to consider whether their portfolio is still appropriate for them in light of any changes in their personal circumstances, such as their employment status or dependants.
5. Consolidate investments
Getting all your investments under one roof will help you to make them more manageable. Being able to look through your portfolio online 24 hours a day, seven days a week is a convenience which is now available to investors today, but there are plenty of savers who still run their portfolio from an overstuffed drawer full of paper. The Christmas and New Year break might provide an opportune time to get rid of the paperwork and go electronic. Transferring to an online SIPP, ISA and investment account is a straightforward process once you know where your existing investments are held. Once you’ve done it you can look over your savings at the click of a button, and you can use that drawer for something else.