More than nine out of 10 DIY investors are unwittingly damaging investment returns because they fail to regularly rebalance their individual savings account (Isa) portfolios. Advisers describe rebalancing, an essential process for an efficient Isa portfolio, as the "holy grail" of investing and say the vast majority of new clients they take on do not do it regularly.
Rebalancing is all about cashing in your star-performing investments, which now represent a larger proportion of your portfolio, and reinvesting into parts of the portfolio with more potential.
Rebalancing forces you to ask yourself: "Is my Isa portfolio performing as I expected?" And: "Does it meet my financial objectives and is it in line with my attitude to risk?"
The key to it is selling at the top of the market and buying at the bottom - a process that, if done right, means you can take control of your own investment risk and make sure it's at the right level for you.
If some of your investments have performed well and some have performed badly, this can change the overall shape of your portfolio and it could mean your risk exposure is off-balance. This will be the case in the vast majority of portfolios, which means you probably need to take action.
5. How often should I rebalance my Isa?
You need to strike a sensible balance between tinkering around with your portfolio too often and missing opportunities by being too complacent.
Advisers all agree you should rebalance your Isa portfolio at regular intervals. Shares require much more regular attention, but fund investors could 'look' at their portfolio every two months but shouldn't 'touch' it more than every six months at the most, according to most investment professionals. And some advisers recommend waiting as long as a year between making changes.
Patrick Connolly, financial planner at AWD Chase de Vere, says sticking to a rebalancing schedule means you can avoid getting overemotional about your investments.
"You can avoid the emotional input that leads to many investors buying at the top and then selling at the bottom and having a thoroughly miserable experience throughout," he says.
6. What does a balanced portfolio look like?
Every investor builds their portfolio differently according to their needs and risk appetite, but there are some rules you should stick to if you want to reinstate some balance into your investment mix.
There is such a thing as having too many funds. Advisers recommend you should have no more than 15 to 20 at a time. This is because owning more than that makes them difficult to keep track of, and you're more likely to replicate the market if you have more than 20 funds - which is pointless and expensive.
And if you're investing in shares, 25 is a sensible number to hold according to Ben Yearsley, head of investment research at Charles Stanley. "Because individual shares are high-risk you need a good spread but you don't want more than you can frequently monitor."
To keep your number of holdings at bay, if you are tempted to invest in a new fund, first reassess whether it should replace one of the existing funds. This will force you to challenge yourself on the case for continuing to back each fund, as they will need to prove they deserve a place in your portfolio.
7. How do I decide whether to sell a fund?
Selling funds that have had a good run is one of the most important parts of rebalancing. Knowing when to sell a fund that’s been doing well isn't easy, but remember even the best fund managers don't tend to beat the market for more than a few years at a time so if you've enjoyed several years of outperformance on a fund it may be time to sell up.
A portfolio in which all the investments are doing well is rare and that's why rebalancing is so important. All asset classes and most investment funds have periods when they perform well and periods when they perform badly, and this varies from year to year as market conditions change.
When choosing whether to hold or fold your poor performing funds, it should boil down to the reasons for the poor performance and its future prospects.
Compare it with peers within its sector - how is it performing compared with them? You also need to compare it against its benchmark - has it mainly under -or overperformed?
According to Jason Hollands, head of business development at Bestinvest, if a fund has consistently underachieved there is no logic for sticking with it over the long term, unless there is demonstrable evidence that a turnaround process is in place. For example, with the appointment of a new manager with a credible track record elsewhere, or an overhaul of the investment process.
Mr Yearsley says if you've assessed one of your holdings and it's been underperforming for a year, alarm bells should be ringing and you should be thinking about rebalancing.
But don't be too hasty to sell. If you do find an investment has underperformed, make sure you know why it hasn't performed well and whether that is likely to change in the future.
Funds can go through periods of poor performance when a manager's investment style is out of step with prevailing markets. Until recently many 'value' managers were underperforming because markets have been driven by policy decisions from central banks and risk-on/risk-off trades, rather than company fundamentals.
But if a manager can prove they can add value over a longer period and have stayed true to their investment strategy, you should stick with them and even consider buying more of them if you believe they could do well in the near future.
8. How do I pick new funds?
Unfortunately, there's no silver bullet to predicting which funds will thrive over the next 12 months, or three or five years. But there are some traps you need to avoid falling into if you want to maximise your chances of success.
Performance league tables are the worst way to pick funds, according to Jason Hollands, head of business development at Bestinvest. He says chasing past performance by jumping at hyped-up funds that have produced strong short-term returns is a common mistake.
Funds' glory moments are often short-lived, so just because you spot one that appears to be doing well it doesn't necessarily mean it will be more likely to do better than a fund that has underperformed this year. Jump at the wrong fund without proper research and you could face losing money as a period of poor performance begins just as you've invested.
"You need to find where the value is now. Stand back and look for undervalued funds," says Mr Holland. Something to avoid when choosing new funds is making isolated decisions. Even if you've found a fund you're confident backing, make sure you ask yourself whether it fits in with your portfolio.
9. Strip back on bonds and buy shares
Advisers are divided on whether you should consider the state of the UK stock market when rebalancing your portfolio. This is because you should be taking a long-term approach to your investments, so in the end it could make very little difference to your returns.
But those who say you should act are telling bond holders: "Quit while you're ahead!" If this is you, you'll have enjoyed the benefits of the recent long-run decline in interest rates. But fears are now rife that this cannot go on forever and interest rates will soon rise.
Darius McDermott, managing director of Chelsea Financial Services, says gilts, which once gave a "risk-free return", now only offer "return-free risk". "Weakness in either gilts or UK corporates should not be seen as a buying opportunity," he says.
Isa savers lapped up bonds in 2012, funnelling almost a billion pounds (£950m) into bonds over the 12-month period, Investment Management Association (IMA) figures reveal. But advisers' top tip when rebalancing your portfolio this Isa season is to go easy on bonds as you might be in for a nasty shock if you hold on to them.
