Intrepid Investors

You know your shares from your SIPPs but could still use a few tips. Here's an ISA MOT and some fund ideas.

The Basics

You’ve already invested and the ISA’s sorted. You know your emerging markets from your bonds. That said there’s always scope for a few cunning tax tips and an investment sense check. When it comes to money even old dogs can learn new tricks. Read on for ten commandments of investing and some recommended funds.

1. Is it time to check in with your investments?

Our needs are always changing, even though it can sometimes seem like it’s always the same (I need more money, please and thank you). Perhaps you inherit some money. Get divorced. Change jobs and have a different income, or change tax bracket. Or maybe there are some dependants on the scene?

Every 12 months or so, it’s worth checking in and seeing whether you need to make some changes. We’ve got a list of questions you can ask yourself each time you do this, to make sure what you’ve got going, however small or large, complex or simple, is still right for you.

2. Which funds do we like?

Just because you’ve invested before doesn’t mean you’re reading this from behind your leather-topped desk, casually flinging complicated securities around the world at the push of a button.

If you think you might be ready for a change in your investments, we’ve teamed up with Square Mile to bring you some fund suggestions. These are based on performance, usability, client communication (this stuff must be comprehensible!) and different kinds of assets.

We'll also share the user view and tell you who our Boring Money readers like and where they invest. Experts or punters............you decide who to listen to!?

3. Pensions

If you're saving up (in the 'accumulation' phase) don't forget that most of us have a £40,000 annual allowance. Even if you don't have this spare cash lying around, there are other things to consider. The ridiculously named 'Bed and SIPP' scheme lets you sell shares or funds held outside any tax shelter (ie ISA or pension) and then transfer the proceeds into a SIPP and buy back the same shares.

When you first sell your investments, any gains you make could be covered by your annual Capital Gains Tax (CGT) allowance – in 2020-21 it's £12,300. If your gains exceed the allowance, you will pay your usual rate of CGT on the excess. But if you make a loss you could offset any other capital gains made this year or in the future.

For those of you approaching retirement, if you are planning on choosing a drawdown option, make sure you know what you're paying and that you choose the best investment to deliver either the income you want or the growth you are chasing. There's more info in our Pensions MOT section.

ISA MOT

How healthy are the insides of your ISA?

If you haven't looked at/thought about/dared to log-in to your investments for the last 12 months, or if your family/financial circumstances have changed, it's time to bite the bullet.

Here are five core questions you should ask when you do feel ready to look over the investment situation.

1. Here are the first commandments for investing

3 months' income in cash?

The only time we really lose money in the stock markets is when we are forced to sell. If we can afford to wait, stock markets usually recover. Have you got three months’ income in easy access cash? And would you be OK if stock markets took a tumble? What are your time frames and what is your cash buffer? Is it time to add a bit of risk to your portfolio and aim for higher returns.

Do you need income?

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.

Do you have the time for this!?

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 at 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.

MD Holly tends to put half of her savings into one of these. "It’s the more sensible but boring bit of my portfolio. Saves me from myself!"

Is there a home bias?

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’. Holly says "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."

Do you have some 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.

We 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 LansdownInteractive InvestorThe Share Centre and Morningstar as a few options.

Is active actually active?

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 (see the picture to the right).

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 (http://www.lindselltrain.com/)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, which shows commitment to his ideas. Both of these are available through Hargreaves Lansdown.

Are your funds too fat?

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.

Are you spread around?

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. Really, it won’t. It is worth aiming to hold a balance of sectors, geographic regions and market capitalisations.

Holly says, "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!"

'Bed and ISA' !?

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. We kid you not. This is a good idea if you have any shares held outside ISAs and dont have the spare cash to invest in ISAs this tax year. 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.

Overweight one area?

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.

More than 8-16 funds.....?

As a rule of thumb we 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. Our average Boring Money reader holds 11. (PS Remember the tax implications of selling outside of an ISA or SIPP.)

Pensions MOT: 4 Stages

1. How Much Have You Got?

What's in the sock drawer?

This means turning out that drawer, leafing through ancient correspondence and working out where you have pensions. Pension schemes of which you’ve been a member should be sending you a statement each year but they may well not know how to find you.

Tip: If you’ve moved and they’ve lost you, don’t panic. There is a dedicated government service to help you track down ancient pensions - https://www.pensiontracingservice.com. You can also approach the pension provider or your old employer if you’re no longer getting statements. It’s worth drafting up a generic letter and sending it to old employers – when did you work at the company and how can you trace your pension?

Once you have waded through the 12 pages of disclaimers and actuarial gobbledygook, there should be an estimate of how much income your pension stash might get you in retirement. Equally, you can go into one of the many online pension calculators to get an idea – try Hargreaves Lansdown, the Money Advice Service or Which.

How generous is your company?

Still working? Most of us now get a pension from the boss by law. The minimum payments this year are 3% from the company and 5% from you. If you work for a bigger company, it's always worth checking if they will match any additional contributions from you - this is money for jam.

Get an estimate of your state pension

Your state pension is valuable, but you only get it if you’ve made enough National Insurance contributions. A State Pension statement will give you an estimate of how much State Pension you might get, based on your National Insurance contribution records to date.

You can also top it up if you don’t feel you’ll have enough. It will also help you understand how any future National Insurance contributions might increase the amounts shown. We can't explain it here as you’ll all lose the will to live (not easy!) but you can check it all here: www.gov.uk/check-state-pension (https://www.gov.uk/check-state-pension)

What have you got in any personal pensions or ISAs?

Tip: As another very rough rule of thumb, take the balance you have in any personal pensions and divide this sum by 20. Some say 25. This gives you an indicator of how much you might get each year in retirement. So – for example - £100,000 in a private pension could translate into an annual income from that pension stash of about £5,000.

If the combination of your personal, employer and state pension doesn’t look like it’s going to be enough, acting earlier will help. Up your annual contributions, or put more into your ISA.

2. Grit Your Teeth And Do The Admin

Set aside half an hour once a weekend for pensions admin. Yay! With a bottle of wine in the fridge as a reward.

It is tough to work out if you’re invested in the right thing if you don’t have all your pensions in one place. Consolidation can be a good option if you’ve built up a number of pension pots during your working life. You may also get cheaper % fees from pension providers with a larger pot. Combining them is a bit of an administrative hassle, but it’s not super-difficult.

Be warned, your pension provider may charge you, so before you instruct any moves do phone them (boring, sorry) and ask them to walk you through any applicable exit fees.

Also if you have an old defined benefit or final salary scheme be very careful about moving this. Anything with the word ‘guarantees’ in the paperwork is probably quite valuable and not worth cashing in without understanding fully what you’re doing.

Tip: You can now consolidate your pensions into one account managed online. These guys want your business and so get them to do all the nasty consolidation paperwork for you. Just send them a note with all your existing pensions and tell them to transfer them over. Have a look at our Best Buys pages for what we think about pensions providers – and what other customers think.

3. Check You're Invested In The Right Things

The temptation is to think that because it’s for your pension it needs to be in ‘safe’ assets. However, most advisers suggest that those with a way to go before they retire should be prepared to embrace ‘riskier’ investments – such as the stock market - because they have time to recover from any market shocks. They also need to protect themselves against inflation and historically the stock market has been a better way to do this.

Put simply, if you have 20 years to go til retirement then really having most or all of your money in shares makes sense. Of course there are risks involved but there’s also little point in going backwards in cash for 20 years.

Tip: There are loads of ‘risk profilers’ online now – look at Nutmeg or Moneyfarm or Scalable Capital for newer digital options. Although these calculators in general can be a bit two-dimensional, they are a useful way to sense-check where you might sit on the spectrum and may force you to challenge your received wisdom!

4. Check The Numbers

Put bluntly, pensions are one of the only legal tax wheezes in town. The appallingly explained tax relief should be rephrased FREE MONEY with pink neon signs at bus shelters up and down the land.

Taxpayers get an extra £20 for every £80 they stick in, and then higher rate taxpayers can claim back another £20 on their tax return.

So it’s a trade-off. What can you sacrifice now and set aside till you are at least 55?

You can pay up to £40,000 a year into pensions and if you come into a lump sum, you can use the previous three years’ allowance. Just watch the annual lifetime allowance. More than that and you’ll get hammered by tax.

Tip: If you have some shares or investments lying around outside an ISA shelter, you could transfer these into a pension online and use these investments as a pension contribution. And get lovely free money for shoving them into a pension. Weirdly called ‘Bed and SIPP’ by product engineers who need to get out more. Google it!

5 Top Fund Picks

With about 90,000 variants of funds in Europe, it's no wonder that the plethora of choice can make us feel a bit weak. Make sure you have a good mix of investments and regions. Check out what the analysts have to say. And look into the Best Buys lists on the investment platforms.

Remember that there is little point in spreading your bets around too much. If you end up with 10 UK equity funds for example, you're probably averaging out any outperformance of the better ones and so you may as well just pick a cheaper 'tracker' fund. If you're going to pick some active funds, then you need to have some conviction about who you pick so you don't end up with a ridiculously fat portfolio. We talked to someone with 75 funds in his SIPP a few month ago. That's bonkers!

Tips from Square Mile

There’s no harm in getting free advice from experts where you can. With that in mind, we’ve grilled the clever folk at consultancy group Square Mile to give us a few top tips.

  • For its worldwide exposure, they haven’t gone for the bog-standard global funds with 'quite a lot' of Apple and China Mobile, but instead they’ve picked a blended smaller companies fund – the Standard Life Investments Global Smaller Companies fund. This looks for the leading companies of the future, aiming to buy them when they are still small enough to have lots of growth (and share price returns) ahead of them.

  • They also suggest the Stewart Investors Worldwide Sustainability fund. This is more defensive, looking only at the highest quality companies. Importantly, it has a stewardship screen, which means that you won’t find the underlying companies doing all sorts of nasty stuff such as breaking labour laws, polluting the environment, or nicking sweets from children.

  • In the UK, a few names have tended to dominate best buy lists – Neil Woodford, for example. However, there is far more choice available and it can pay dividends (literally) to look for more under-the-radar managers. Square Mile suggests the Liontrust Special Situations as a ‘steady Eddy’ fund. It looks for companies with a clear competitive advantage. It also throws off quite a nice income, even though it’s not designed as an income strategy.

  • The Threadneedle UK fund is an option for those who like a carefully-selected blue chip fund. Manager Chris Kinder looks for profitable companies with strong franchises, and barriers to deter potential competitors.

  • Unicorn Income is, as the name suggests, an income strategy, but looks beyond the stodgy oil companies and banks that traditionally make up UK equity income portfolios. The fund has a natural bias to small and medium sized companies and as a result it can and does look very different from a large number of competitor strategies. It could therefore be held alongside a tracker, or blue chip fund.

There is so much choice in the UK funds market. Rather than stick with a handful of high profile managers whose best returns may be behind them, we suggest giving one or other of these options a try. Want to see the full nine? Check out our Funds Guide.

Your Options

Check your ISA is held in the right place

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, we 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!

Have a look at our Best Buys table to compare the different investment platform providers where you can buy and manage your shares, funds, ISAs and pensions. You can also see what 'real people' have to say about their chosen services. 

Make sure you're in the right funds

Here are links to some of the suggested funds, courtesy of independent house Square Mile, so you can check them out. The full list can be seen on our Intrepid Investors Tribe page.

Pensions MOT

Track down your previous pensions: https://www.pensiontracingservice.com

Use an online pension calculator to get an idea of how much you may have:

Hargreaves Lansdown

Money Advice Service

Which

What sort of risk mix is right for you? Have a look at online risk profiling tools:

Nutmeg

Moneyfarm

Scalable Capital

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