The end of the tax year is a prime time to take stock. Whether it’s using up pension and Isa allowances or checking you have the correct tax code so you aren’t paying too much, a new year feels like the perfect time to pause and reset.
It’s also an ideal time to tidy up your investment portfolio. From making sure your holdings still align with your long-term goals and fit with your risk tolerance to searching around for new ideas or simply adding more to your existing holdings – here are five ways to check your portfolio is on track for the year ahead.
Reassess your risk
When you started out investing, it’s very likely that you took a questionnaire or did some research to determine your risk tolerance. This is what helps us pick the most appropriate investments to grow our money without losing sleep at night.
But when was the last time you assessed your risk? Just like your favourite movie or restaurant is probably not the same today as it was 20 years ago, your attitude to risk will change over the years as well.
When you start investing and are still building your confidence and knowledge, you might be more cautious than someone who has been dabbling in shares for decades, for example.
Or if your goal when you started was to save for a house deposit in five years, it’s likely you will have been taking less risk than someone investing for their retirement in 40 years’ time.
Consider your investment goals and how long you are planning to tie your money up, as these will also influence your choices. Think about your other financial commitments and how your investments sit alongside these.
Riskier investments can potentially lead to greater long-term rewards, but often with more ups and downs along the way – be honest with yourself about how this would make you feel. If your goals have changed or your confidence has grown, it could be time to tweak your portfolio to reflect that.
Top up your existing holdings
If you are still confident that your investments align with your risk tolerance and will deliver over the long-term, top them up. It makes sense to add regular amounts to your existing holdings to increase your stake in them over time.
A regular investing plan is an easy way to do this – it is simply a direct debit to invest a set amount in your chosen investments each month, which means you don’t have to remember to do it yourself.
The end of the year is a great time to rebalance your portfolio. This means taking some of the profits from your top performing holdings and redeploying them into those that have not done as well.
That might seem counterintuitive, but if you still have faith in all your investments then it makes sense to buy more of the holdings that potentially have further to run, while crystallising some of the gains from those which have already done well, in case they fall back.
Consider new opportunities
While you don’t want your portfolio to become too sprawling, occasionally it is worth adding something new into the mix.
When considering new investments, be sure to do your research – don’t just pick something because it is popular or has performed well recently.
Look at the investment case for the fund, share or asset and the factors that could drive it to grow further. Compare it to other similar investments and consider what makes it the better choice. Finally, be sure to check the fees and charges as these can eat into your returns over time.
Also weigh up whether adding a new holding means you should ditch another. You don’t want more investments in your portfolio than you can easily keep track of – not only does it become difficult to monitor everything, but it also means you dilute your exposure to each holding so don’t benefit as much when they rise.
While it is important not to be short-termist, if a holding has consistently underperformed, the investment case for it has altered, or something major has changed such as new management, then it might be time to cut your losses.
Make sure you are diversified
You might think you have a good spread of investments, but look under the bonnet and you may find they are not as diverse as you had thought.
Perhaps, for example, you hold a fund that tracks the S&P 500 (the US stock market) and another that follows the MSCI World (the global stock market). The US market makes up about 75 per cent of the global market. Moreover, the top 10 stocks in the MSCI World are all companies listed on the S&P 500.
That means you are investing in a lot of the same things twice, making you far more exposed if there is a market fall. If you also have a technology fund, you are likely investing in some of these businesses three times over.
In a globalised world, and particularly after years of US stock market dominance, this can be quite difficult to avoid. Look at the factsheets for all of your investments to see how exposed you are to different regions and sectors.
A global tracker fund can be a great foundation for a portfolio because they are low cost and give you access to thousands of top companies across the globe. But if you do hold one of these, make sure that any additional funds you choose do not overlap too much. Consider more niche or specific areas that bring something different to your portfolio.
Keep some powder dry
This is a time of year when many savers are scrambling to use up their pension and Isa allowances and doing so can lead to rushed or panicked decisions. But if you are not sure where to invest, here’s a tip: don’t do it.
As long as your money has been put inside its cosy Isa wrapper by April 5, it enjoys its tax-free shelter regardless of whether you have actually put it into the market yet or not.
Don’t be afraid to leave some of your money on the sidelines while you work out how best to deploy it. That’s a far safer strategy than rushing an investment decision and potentially getting it wrong.
Known as keeping some powder dry, many investors like to leave a small proportion of their portfolio in cash so that they are ready to strike if an investment opportunity arises.
Tax treatment depends on individual circumstances and may change in the future. Investments can go down as well as up, and you may get back less than you invest. Moneybox or its associated third parties do not offer personal financial advice or make specific recommendations based on your individual circumstances. If needed, seek independent financial advice before making decisions regarding your financial goals.