Laith Khalaf, head of investment analysis at AJ Bell, looks at six questions that can help investors spring clean their portfolio:
“As a new tax year dawns, fresh pension and ISA allowances open up and a host of new tax changes are ushered in. It’s therefore a good time to review your finances across the board, including your investments. Even the most considered portfolios still need regular reviews in order to keep them on course, and to account for any changes in your circumstances which might call for a different tack. There’s no need to make changes simply for the sake of it, but equally you might find a few holdings in your portfolio which leave you scratching your head as to why they’re there.
“There has also been a big repricing in some major markets over the last year or so, most notably the bond market and the S&P 500, so your portfolio might look a bit different to the last time you peered under the bonnet. For those ready with a feather duster and apron to do some portfolio spring cleaning, addressing a few basic questions can help give some structure to the process.”
1. Has your personal situation changed?
“Probably the most important thing to assess is whether there have been any material changes in your personal situation. Getting married, having a child, or buying a bigger house can have an impact on your finances, such as your life insurance requirements, and the need to update your will. But life events might also affect how much risk you’re willing to take with your investment portfolio, for instance if you’re approaching your retirement and looking to start drawing on your pension. So consider what, if anything, has changed personally, and how this might affect your attitude to risk.”
2. Has your portfolio become bent out of shape?
“Market prices aren’t static and as a result neither is the shape of your portfolio. Over short periods this won’t make much difference, but given time the equilibrium in your portfolio can be lost as some bits move up faster than others. Regular rebalancing is therefore an important discipline to keep your portfolio in good order. As a simple example, consider a portfolio that was 50% invested in UK equities and 50% invested in US equities five years ago. Today that portfolio would be approximately 60% invested in the US and around 40% invested in the UK, because the S&P 500 has performed much better than the FTSE All Share. Of course, to be properly diversified you should have more global exposure than just two markets, but this illustrates how one part of your portfolio moving faster than the other can change its shape. After a review you might well choose to run with a higher US allocation, but at least you have made a considered decision rather than simply letting the balance in your portfolio be dictated by market movements.
“As well as the regional split of your portfolio, you should give some consideration to the allocation across asset classes; equities, bonds, property, cash, gold and other alternatives. You should also consider whether any sectors have performed particularly well and now make up an outsized part of your portfolio. Finally, see if any specific funds have done a lot better than others and now constitute a large part of your portfolio. That’s clearly a good sign, but it’s worth making sure that your portfolio returns are not too heavily reliant on just one fund manager, no matter how good they are, because even the very best can go off the boil.”
3. Have you got any poor performers?
“At the other end of the spectrum, you should check your portfolio for any serially poor performers. These are not funds which have had a bad year, or even three years, simply because their investment style is out of favour, but rather funds which have lagged behind competitors for a long period and show little sign of change for the better. You should consider replacing fund duds with more promising active funds, or cheaper tracker funds which won’t outperform but aren’t charging the higher fees associated with active management for the privilege of underperforming.”
4. Is the investment case still solid?
“As well as inspecting performance, it’s worth checking that the fundamental reasons you bought an investment are still in place. For funds and investment trusts, make sure there hasn’t been a change in fund manager or strategy, and if there has, consider whether it’s still fit for purpose. For shares, consider if the reason you bought an investment has now run its course or has still got some legs. Also consider if the business has undergone a material change in strategy or circumstances which make it a less attractive investment proposition.”
5. Have any new ideas or opportunities cropped up?
“A portfolio review is a decent time to scout around for new investment ideas, which might replace funds or stocks you’re selling. Are there any emerging trends you might want to buy into? Or are there any fund managers who have finally clocked up a long enough performance record to merit inclusion in a portfolio? One thing which has changed over the last year or so is a big fall in bond prices, and a rise in yields. Those who have shunned bonds as part of the diversification in their portfolio, preferring instead perhaps property, gold, cash, or absolute return funds, might give consideration to whether bonds should be back on the menu.”
6. How can I reduce my tax bill?
“The final piece of the jigsaw is to make sure your portfolio is invested as tax efficiently as possible. A new tax year means fresh pension and ISA allowances, which will protect your investments from capital gains tax and income tax once they’re wrapped inside the tax shelter. The sooner you put your investments inside the ISA or pension, the sooner the protection kicks in. This year tax planning feels particularly relevant, because the capital gains tax allowance is being cut from £12,300 to £6,000, and the dividend allowance is being cut from £2,000 to £1,000. These allowances will fall to £3,000 and £500 respectively from April 2024, and any gains or dividends above these amounts are taxable if held outside of a tax shelter.”
