Our needs are always changing
Perhaps you have inherited some money. Changed jobs and have a different income? Changed tax brackets? Or maybe there are some dependants on the scene?
Commandment 1: Review your position on ‘safe’ versus punchy
How are you feeling about the world? Chances are, you may not feel like taking a risk on Bitcoin when you’re a few months into new parenthood, or if your company is going through a rough patch. You may just feel like you’re getting on a bit and wealth preservation is more important than capital growth. Your personal circumstances will influence your investments, including the amount you hold in riskier assets, such as the stockmarket.
The only time we really lose money in the stock markets is when we are forced to sell. Have you got three months’ income in easy access cash? And would you be OK if stock markets took a tumble? If so, time to add a bit of risk to your portfolio and aim for higher returns.
Commandment 2: Income versus growth
Growth may be appropriate when you are young and thrusting (oooof), but if you want to take a step back in your career, work part-time or change jobs, it might be time to shift your portfolio to create an income stream. This is easily done but may necessitate a greater focus on areas such as global and UK equity income, or higher-yielding bonds. Some top UK equity income funds pay about 3% - 4% income a year – look at the fund shortlists on leading platforms such as Hargreaves Lansdown or check out Trustnet Direct for ideas.
Commandment 3: Do you have the time?
This one needs you to be really honest. Do you have the time to look after your portfolio? Do you follow markets? Do you rebalance every year to keep a well-diversified portfolio? If so, great! If not, these days you can buy a passive multi-asset fund as a very low-cost (about 0.2%) and this will give you access to a diversified portfolio of global assets which a nerd continually tweaks on your behalf. I tend to put half of my savings into one of these. It’s the more sensible but boring bit of my portfolio. Saves me from myself!
Commandment 4: Diversification
Take another honest look. How much of your portfolio is in the UK? Probably more than you would have if you lived in Germany or the US. This is known as home bias. It’s OK if this is on purpose and you are very bullish on Britannia. If not, and it’s just because you know the brand names, then this is ‘home bias’. It’s why I had 40% in Australian equities in my early portfolio when I lived there as a young pup. Bonkers. There are lots of great global funds which give you access to brands and markets from across the world.
Have your funds changed?
Commandment 5: Spot your dogs
Is your fund rubbish? Whether it was great and is now rubbish or has always been rubbish and you just don’t want to admit you made a mistake, you should check. In this respect, Tilney Bestinvest’s ‘spot the dog’ guide – which identified serial underperforming funds that probably should be avoided or jettisoned – can be helpful.
Judging when to sell is tricky. Selling because the numbers look bad over a year is quite often silly. You’re guaranteed to spend money on transaction fees, making the platforms richer and ensuring that you’re always playing catch-up.
But if it’s a turkey and the majority analyst opinion is that it’s a turkey then it might be time to sell. I suggest looking at about three well-known research houses or investment platforms to see if there is a consensus view from the number crunchers. Try Charles Stanley Direct, Hargreaves Lansdown, Interactive Investor, The Share Centre and Morningstar as a few options.
Commandment 6: Is your fund earning its crust?
Another thing worth checking is that if you are paying active fees that you’re genuinely getting active performance. Looking for funds with a high ‘active share’ – it should be on their factsheet:
This means they aren’t charging you a big fee for brain power and then playing chicken, hedging their bets and just doing what everyone else is doing. We like Nick Train at Lindsell Train for making calls and putting his money where his mouth is. Terry Smith at Fundsmith is another who holds very few stocks in his funds – usually less than 30. Both of these are available through Hargreaves Lansdown.
Arguably the active share % could be called the Cojones-O-Meter. (was that cheap!?)
Commandment 7: Are your funds getting larger?
It is a sad fact of life that the investment industry tends to incentivise fund managers to grow larger and larger funds, but it can lead to a drop-off in performance. It even has a name - ‘asset bloat’ – truly, the gluten of investment funds. If your fund is pushing £1bn, see if there might be a better alternative. There may not be and there are plenty of good funds of this size, but it’s worth a review nevertheless.
Commandment 8: A question of balance
It's easy to fall in love with those investments that have done well for you. If you’ve made a load of cash in Bitcoin, it’s easy to think that will go on forever. It probably won’t, so it worth rebalancing your portfolios every now and then to stop you having too much in a handful of holdings that have done well in the past. It is worth aiming to hold a balance of sectors, geographic regions and market capitalisations.
My uncle holds an Alaskan mining company and tells me that it is up and down with the news which veers from dismal to glee. This barmy share has more than doubled in value. I tell him he should sell half, take his original investment off the table, and then the rest of this gambling exercise is just potential upside. He doesn’t listen but at least I have bossed him into having more than 90% of his money in sensible stuff!
Commandment 9: Watch your tax wrappers
It is easy to end up with odd investments all over the place. The investment trust saving scheme here, the platform experiment there, a bit in robo and so on. This can mean you are not using your ISA and pension allowances, but have ‘unwrapped’ income, on which you are paying tax. It’s worth sorting this out by transferring investments into a tax structure.
Read up on what is crazily called Bed and ISA or Bed and SIPP. I kid you not. You can ask some platforms to transfer shares or funds into an ISA so it becomes that year’s ISA contribution. It quarantines these investments from future tax. Also good if you have the spare money and can transfer investments into the tax beneficial pension environment.
Commandment 10: Check for overlaps
ISA portfolios are often made of up of a whole host of funds and trusts, many of which may invest in the same stocks. This means you can end up with large weightings in one or two stocks or sectors. This isn’t a great idea from a portfolio diversification point of view even if you really love those companies. Most of the trading platforms allow you to ‘look through’ your portfolio to the weightings in the US, Europe and so on. It will also tell you how much you have in any one company or sector. Hargreaves Lansdown, for example, has a ‘portfolio analysis’ tab and ‘x-ray’ analysis.
Bonus Commandment: You hold how many funds?
(OK, I’m sorry, this is point number 11 but I didn’t want to let the truth ruin a headline.)
I have spoken to people who get so anxious about picking ‘the wrong horse’ that they have more than 50 funds. Completely mad and a good way to unravel any good work that a fund manager might do.
As a rule of thumb I think 8 – 16 is sensible depending on the size of your portfolios. If you’re holding much more than that, you’re probably over-diversified and won’t be getting the benefit from the active managers you hold. If this is the case, consider trimming back to a more focused portfolio. Remember the tax implications of selling outside of an ISA or SIPP.
PHEW! At this point you’re probably ready for a glass of vino and some bad telly. Well done. Job done for another 6 months! As a final note, I do love this quote from George Soros:
“Good investing should be boring.”
His point was that if you enjoy it, you’re probably not very good at it. i.e resist the urge to endlessly tinker for the sake of it!
Research investment providers here