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Five resolutions for 2012

Five resolutions for 2012

It's January. Time to make some financial resolutions that will put some zing back into your portfolio after the woes of 2011.

The past year has been tough for equity investors with the FTSE 100 index losing more than 5 per cent in 2011 - and returns in 2012 are likely to remain volatile.

On the positive side, the UK is the only country in Europe where a majority of investors (55 per cent) are pleased with their investment decisions in 2011, according to new research.

Investment house Schroders polled more than 1,400 affluent investors across 10 European countries. While the level of investor satisfaction was strongest in the UK, investors also expressed a number of investment regrets:

•The top regret in the UK was not starting to invest earlier in life (16 per cent). This is further illustrated by half saying that their top piece of money advice they would pass on to their children would be to start saving as early as possible.

•Almost one in 10 UK investors (9 per cent) also said they regretted having been too conservative with their investment decisions during the year.

So how do you make sure that you don't have any regrets at the end of 2012? Here are our essential tips:

1. SAVE ENOUGH FOR 'NO REGRETS'

According to the Schroders' survey, 13 per cent of UK investors said they wished they had invested more money.

Work out how much you should contribute and how much you could receive when you retire using our free pension calculator at www.investorschronicle.co.uk. If you have a large budget, you could get a chartered financial planner to do a holistic portfolio review. Visit www.financialplanning.org.uk for more information.

Alternatively, a cheaper service is available from www.RetireEasy.co.uk. The online software programme (annual cost £79) enables you to input all your financial details. It then models whether with different inflation or investment outcomes your money will last you for whatever time period you choose. It takes into account your tax rates.

If you have time, some IC readers say they have managed to model something similar themselves using an Excel spreadsheet.

2. DON'T OBSESS ABOUT YOUR INVESTMENTS

Volatile markets can affect your health. Sharp moves in stock markets are closely correlated with a rise in heart attacks, according to new analysis. Bernstein Research said they showed that share performance has a greater statistical effect on health than cardiovascular drugs released in recent years. So try to focus on the positives. While the Mayans may predict the end of the world on 21 December 2012, we don't think it will be that bad.

Patrick Connolly, certified financial planner at AWD Chase de Vere, says: "What investors can expect in 2012 is lots more volatility and share prices being driven by economic news with the risk that we will see stock market falls. However, riskier assets such as equities are sitting at attractive valuations and at some point will rise in value, which is good for the long-term investor - we just don't know whether it will be in 2012."

Andrew Morris, managing director of Signature, the arm of Rowan Dartington dedicated to supporting investment professionals and their clients, gives some reasons for optimism in 2012:

•Inflation is set to fall

•Interest rates to stay low

•Commodities set to fall further

•Clarity on the eurozone solution

•US elections to restore clarity to financial policy

•US economy is currently strengthening

•Equities are very cheap

•And finally….holidays to Europe look set to become cheaper - as the euro weakens.

3. GET AN ASSET ALLOCATION PLAN

Asset allocation is important as most people who make investment predictions tend to get them spectacularly wrong. For example, at the beginning of 2011, the general consensus was that gilts were over-priced and yields were too low, yet over the year UK Gilts and UK Index Linked Gilts have been the two best-performing investment sectors.

There are no one-size-fits-all asset allocation solutions, as none of us knows how long we'll live, so you'll never get the asset allocation of your portfolio perfect.

But you could start with the five private investor indices provided by the Association of Private Client Investment Managers and Stockbrokers (APCIMS) to reflect the differing aims of investors:

•the Conservative index

•the Growth portfolio

•the Income portfolio and

•the Balanced portfolio

•the Global Growth index

Each of these portfolios contains different proportions of UK shares, international shares, bonds and cash to reflect the investment aims.

Mr Connolly says: "As always, the key for investors is to hold a balanced and diversified investment portfolio, although to generate strong returns investors must be wary of taking too little risk just as they must be wary of taking too much."

An alternative portfolio for cautious investors is the Harry Browne Permanent Portfolio structure (25 per cent equities, 25 per cent long-term government bonds, 25 per cent gold and 25 per cent cash). This aims to preserve your capital even in the worst economic conditions. One of our readers tries to manage his portfolio according to this structure - read about it here.

4. REBALANCE YOUR PORTFOLIO

Gather up your recent investment statements and take note of your current asset allocation. See if it fits with your asset allocation plan. If your portfolio is not in line with your target asset allocation then you need to make sure it does. You may need to sell some stocks. Be ruthless.

Slim your portfolio down if necessary. Far too many investors hold too many stocks, meaning they are running closet trackers. We see this in our regular portfolio sanity-checks - read 'A portfolio full of clutter'. (If you would like a portfolio review then email moira.o'neill@ft.com) Some of the best fund managers think holdings in 25 companies is enough for any portfolio.

Besides the rebalancing issue, a thorough review also includes evaluating individual holdings in your portfolio, to see if they still offer what they did when you bought them. For funds, several questions would arise. For example, does your small-cap fund still own small caps? Are all the managers to whom you entrusted your money still in the same roles at the same funds? You can find out this information on the fund's website, updates monthly or quarterly.

5. LAST BUT NOT LEAST…GET THE TAX STUFF RIGHT

January is a tax month and pensions can be used to alleviate your tax burden - particularly important as the government income tax relief on pension contributions could be under threat in the future. It is common for higher-rate taxpayers (anyone with annual taxable income of over £42,475) to fail to claim the additional 20 per cent tax relief they are entitled to in respect of their pension contributions.

There is also the opportunity to back pay into your pension to catch up with any contributions that have not been maximised over the previous three tax years. Read 'New pension rules create window of opportunity'.

If you expect your total pension savings to be more than £1.5 million when you come to take your benefits on or after 6 April 2012, you can use 'fixed protection' to protect them from the lifetime allowance charge. You can apply for fixed protection until 5 April 2012. Visit www.hmrc.gov.uk for details.

On the other hand, you may be starting to think - as we are - that the tax advantages of pensions do not outweigh the draconian rules and inflexibility.

So make sure you use your individual savings account (Isa) allowances, too. For 2011-12, the maximum Isa contribution limit is set at £10,680, rising to £11,280 from 6 April 2012, up to half of which can be saved in cash. If you are married, your spouse also has this allowance. Plus, investors with children should note that in the autumn of 2011 the UK government also introduced Junior Isas, allowing friends and family to save or invest £3,600 a year on a child's behalf.

Read more tips for New Year's resolutions here.

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By Moira O'Neill,
03 January 2012

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Moira O'Neill

Moira joined Investors Chronicle in 2008 to lead the funds and personal finance coverage. Since then, she's launched the Top 100 Funds, Portfolio Clinic and weekly podcast. She won the Harold Wincott Personal Finance Journalist of the Year for 2012 and has been a finance journalist since 1997.

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