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Ten tips to get your portfolio into winning shape

In this week's issue of Investors Chronicle, we have set out some fund and share suggestions for 2017 and beyond. But if you are a self-directed investor, it it not enough just to pile your money into a random collection of investments, even if they come highly recommended. You need to select your holdings via a very thorough research process and manage your portfolio so it works as a whole for you personally. So we have consulted the experts and set out their top tips on getting your portfolio into winning shape for 2017.

Review your portfolio

If you manage your own investments you should review what you have at least once a year.

"Given that many people make new investments in February and March in the run-up to the tax year-end, it is a good discipline to review what you already hold ahead of this, as the process should provide an insight into the asset classes and markets that you should focus on for new investments to rebalance your overall portfolio," says Jason Hollands, managing director at Tilney Bestinvest.

Individual investments that may have been worth backing in the past might need to be reassessed from time to time: your investments should be performing in line with the purpose you are holding them for. "It's a good idea to use the new year to look at your financial goals, check whether they are still achievable and make any changes necessary to your portfolio - a process known as rebalancing - to help you meet them," explains Tom Stevenson, investment director for personal investing at Fidelity International.


Maintain the right asset allocation

The so called 'Isa season' is upon us and while many investment guides rightly urge people to use or lose their annual allowances, don't just pile into any investment to use up your allowances.

"One of the biggest mistakes some investors make is getting caught up in the end of tax year frenzy and choosing investments on an ad hoc basis," says Mr Hollands. "It's so easy to get distracted by whatever funds are flavour of the month without first considering how these might fit alongside an existing portfolio. It is, however, vital to understand your overall goals, risk appetite and strategy as a precursor to investing any new money into the markets. Review and detox your existing portfolio before investing in a new individual savings account (Isa) or pension."

What counts is your portfolio as a whole, not individual investments. If the investments chosen don't fit into the overall allocation plan that you have determined to meet your financial goals, or don't complement each other, your portfolio could become too risky or not adventurous enough.

"Fund ideas and recommendations are not made specifically with you in mind," says Adrian Lowcock, investment director at Architas. "Think about how a new fund purchase would fit into your portfolio and beware of topical promotions. Think how an investment will affect your risk, liquidity and diversification."

Getting your portfolio to where you want it could involve selling some investments which have performed well and represent a larger proportion of your portfolio, and reinvesting into ones which have performed poorly and account for a smaller amount of your portfolio.


Don't put all your eggs in one basket

Regardless of your risk appetite, it is important to be diversified.

"This year looks set to be another one of uncertainty, so it would be prudent to protect yourself against any potential market volatility," says Mr Stevenson. "The best way to future-proof your investment portfolio against the market's ups and downs is to remember the old adage of placing your eggs in several baskets. No one knows what lies ahead and the best defence is to diversify your holdings across a range of assets such as bonds, equities, property and around the world's geographical regions."


Invest for the long term

While it is important to regularly review and, if necessary, rebalance, investing is a long-term game. Don't constantly tinker - you have to let things develop and grow.

"With the potential reward of the stock market comes risk," says Danny Cox, chartered financial planner at Hargreaves Lansdown. "To beat the returns on cash and make sure your money keeps pace with inflation, there will be times when you'll experience the downs as well as the ups. Stick with it and over the long term you will be rewarded."

And don't panic and sell when the market falls. "There is a tendency to focus on short-term noise and events which can easily clutter investors' minds and get in the way of making well-considered and practical investment decisions," says Mr Lowcock. "Investing is not for the short term and while news cycles and events can drive markets in the short term, they actually have little impact over the longer term. Investors should focus on the long term to help achieve their goals and objectives."

If you don't have a long-term investment horizon of at least five years, then volatile investments such as equities funds are not suitable for you. Riskier investments need time to grow and recover from any falls.


Look under the bonnet

Don't invest in anything before you have conducted thorough research into it. Be clear with a fund's investment objective and the assets it invests in. And know its risks: as well as having an idea of how much money it could make you should also know how much it could lose.

"Making some time to understand your investment choices will help you make better decisions and ultimately you will reap the benefits," says Mr Cox.

Also don't rely on a fund's name or sector categorisation. "They can be misleading and give no indication of true investment risk,"says Brian Dennehy, managing director of fund research and dealing hub FundExpert.co.uk. "For example, funds in the Targeted Absolute Return sector can be nearly as volatile as the stock market."

You should also know what a fund's structure is: unlisted open-ended investment company (Oeic), or stock market-listed investment trust or exchange traded fund (ETF)? How does it work and what are the implications?


And check the charges

There is no guarantee of good performance with any investment, but one that will certainty take a bite out of your return is charges. High charges can be a big drag on your investment performance - especially over a longer-term timescale as they compound.

Make sure you understand the charges your funds involve. Some of these, in particular investment trusts, can have complicated performance fees, so read the small print.

However, charges are not the only thing to evaluate when selecting a fund, so don't just opt for one because it's cheap. "It's important to avoid both expensive and cheap poor performers," says Mr Dennehy. "An expensive fund that significantly outperforms will be of more value to you than a cheaper fund that is poor to mediocre at best."

And it's not just fund charges that add to the costs: the platforms off which you buy them charge in different ways, so check how yours does this and if it is the most efficient way for you to hold your investments.


Don't just go for the highest yield

After years of low interest rates and concerns on bonds, eeking out an investment with a decent income is an increasing necessity for many investors. But rather the fund which offers the highest income, one which grows its income every year is more relevant.

"A reliable, growing income will be crucial through a long retirement," says Mr Dennehy. "Investors must make their own plans and take advantage of the best equity income funds, that is those which prioritise not just income, but a growing income. Remember, the attraction of this income, in addition to its growth potential, is its relative predictability, compared to somewhere like the building society."


Case study

Assume a 60-year-old invests £100,000 into each of two income funds, both yielding 5 per cent, so with a starting income of £5,000 in each.

• Fund X increases payouts by 5 per cent a year, and

• Fund Y increases payouts by 10 per cent a year.

So by age 75, 15 years later:

• Fund X income has grown to almost £9,900, and

• Fund Y income has grown to £18,987, i.e. almost twice as much.

"Choosing the right fund can transform your wealth with all the implications that has for quality of life in retirement," says Mr Dennehy.

Source: FundExpert.co.uk


Also ensure you do not have a lot of overlap. A number of UK equity income funds hold some of the same shares as each other, so make sure your selection complement each other. And think about adding in some overseas equity income funds to improve the diversity of your income sources.


Make sure the price is right

How much money you make from an investment doesn't just rely on how much its price grows, but rather at what stage in the growth you entered - the price you paid for it. For this reason, buying low and selling high is the recipe for investment success.

"However, it's easier said than done, especially when committing your hard-earned savings to a troubled market," says Mr Cox. "But if you are able to sleep at night, investing when the screens are red means buying in at cheaper prices and with the potential for greater profits."


Or invest regularly

If you can't stomach investing when things look hairy, while you should always be mindful of an asset's price relative to its history and the outlook for that area, regular investing has benefits.

"By drip-feeding your money into the market regularly, you will benefit from pound-cost averaging," says Mr Stevenson. "This works because in a fluctuating market you buy more units when prices are low and fewer when prices are high. Buying at a variety of prices and spreading ongoing investments over time helps to cushion your portfolio from dips in the stock market."


Max your cash

However high risk your appetite, you should always have a certain amount of cash, at the very least to cover emergencies. Advisers suggest having easily accessible cash worth about three to six months of your monthly income.

While the returns on cash are low, if you do your homework you can improve them.

"Before deciding on a particular account, make sure you shop around to get the best deal," says Dominic Baliszewski, director of consumer strategy at Momentum UK. "Comparison websites are a good starting point for anyone trying to find a savings account tailored to their needs."

But these don't necessarily cover all the market or offer the best rates, as many comparison websites list the products and services of institutions that pay to advertise with them - rather than the best offers available. So use a few comparison websites to see a wider range of offers, and compare quotes from companies directly as some product providers choose not to be featured on price comparison sites.

Also review your existing cash savings against alternative options to ensure that the interest rate you're earning is competitive.

The personal savings allowance enables basic-rate taxpayers to earn the first £1000 of interest tax-free on investments such as cash, bonds, bond funds and peer-to-peer loans, and higher-rate taxpayers are able to earn £500 in interest before paying income tax on this.

If you have a large amount in cash that may yield interest that exceeds the personal savings allowance, and do not use up all your annual Isa allowance for investments, then consider sheltering some in an Isa.

"If you're looking to build up cash savings the best way is often to set up a direct debit to transfer a monthly amount from your current account to a savings accounts shortly after your payday," adds Patrick Connolly, certified financial planner at Chase de Vere.

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By Leonora Walters,
05 January 2017

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