Update your funds research
Why do it?
This is reasonable question. After all, once you’ve put a load of time and effort into choosing the right investments to put in your private pension or Isa, why do you need to think about it again? And in general, your instincts would be right. You shouldn’t switch funds at the drop of a hat. It will just cost you money and probably not add a lot to investment returns.
However, there are three times when it is worth reconsidering your options:
There has been a significant change in the economic environment. This is not just economy up a bit or down a bit, but something profound and enduring like, say, a pandemic.
You realise you’ve backed a bad fund. Again, this isn’t just a couple of months of poor performance, but significant underperformance over a long period of time to the point where it seems the fund manager has really lost their magic.
Your circumstances change: you get married, have children, gain a lot of money or lose a lot a lot of money.
How to do it?
A portfolio review will very much run along the same lines as your initial fund selection. You will need to look at your circumstances – how long you have to invest, whether you are willing to accept some variability in the value of your investments – and the circumstances of the world around you. For example, if inflation is high, you may need more in the stock market (which has historically protected against inflation) and less in fixed income, which tends to perform badly at a time of rising prices. Does your investment portfolio still fit those circumstances?
Working out whether a fund is a good or bad fund is more difficult. Good funds can have bad patches and bad funds can have good patches. However, if a fund is persistently behind its peer group, you need to start asking questions. Look at whether the fund is still rated by the major platforms, or rating agencies such as Morningstar or FE Trustnet. It also worth checking recent news coverage on the funds in question. This can alert you to problems early – such as the departure of key fund managers.
Are there any pitfalls?
In general, switching investments too often is a bad habit. It costs money and investors often switch just at the wrong time – just before a fund is about to turn a corner, or investing after a long run of good performance. The well-respected Dalbar study shows repeatedly that investors get less than the market return because they tend to buy in and sell out at the wrong time.
How much will it cost?
Switching in and out of collective funds costs a little bit because of the bid-offer spread. Think of this like buying holiday money – there is a price you buy and a price you sell. You may also pay an initial charge, but in practice most investment platforms have reduced these to zero for the majority of funds. If you are buying and selling an investment trust or ETF, you will also pay trading costs. This may be £10-£15 for each trade, depending on the platform.
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