Reviewing your investment portfolio

What you’ll learn:

• How and when to review your asset allocation.
• Why changes in the market, or within your investments, could shift away from your aims.
• What 'closet trackers' are and how to spot them.

Failing to keep a close eye on your investments means you could inadvertently expose yourself to more, or indeed less risk, than you bargained for. And your circumstances may change over time, affecting your financial aims and risk profile.

The past performance of your investments should not be taken as a guide to future performance. But it’s still very useful to regularly review your portfolio, examining assets that are suffering periods of good and poor performance, both in relative – compared to similar assets – and absolute terms.

When you start off investing your portfolio should match your risk-appetite. But over the course of time the assets you hold will inevitably move up and down and your portfolio could end up looking very different to what you started off with.

Say you had 10% of your portfolio in financial shares and the same amount in leisure stocks. If over a 12-month period the former sector enjoys a sustained period of gains while the latter doesn’t go anywhere, you will end up with a lot more of your cash in financials than you began with. As a result, it would perhaps be worth taking some of the money you made on those shares and re-investing it in a sector which has underperformed, thereby getting your asset allocation back to a level you are happy with.

The same principle applies to funds. For example, if you’re holding a UK equity fund, look at how other vehicles in its peer group, the UK All Companies sector have performed, or compare it to its benchmark, in this case it’s likely to be the FTSE All Share.

Remember that if your investment portfolio is housed in an individual savings account (ISA) wrapper, your holdings won’t incur capital gains, dividend or income tax charges. So if you decide to sell investments that have risen in value as part of your efforts to rebalance your portfolio, you won’t incur a capital gains tax (CGT) charge. If you invest outside an ISA, any profits made above the annual CGT allowance, which for the 2018-19 tax year is £11,700, are subject to tax at 18% or 28% depending on your tax band.

Find out more about key tax rates, limits and allowances

All dividends received on shares held in an ISA are also tax-free. If investments are held outside an ISA, only the first £2,000 of dividends earned from investments are tax-free. If they exceed this threshold, you will be taxed at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.

Everyone also has a certain amount of savings income they can earn each year without paying tax, known as the Personal Savings Allowance.

The Personal Savings Allowance (PSA), introduced in April 2016, means that most savers no longer have to pay income tax on the savings income (e.g. interest) they receive.

Your PSA depends on which income tax band you are in, with basic rate taxpayers entitled to a £1,000 allowance, while higher rate taxpayers receive a £500 allowance. Additional rate taxpayers are not eligible for a PSA. You only pay tax on savings income that you receive if it’s in excess of these allowances.

Find out more about the Personal Savings Allowance and what it means for you

Remember that tax rules can and do change, and their effect on you will depend on your individual circumstances, which can also change.

Don’t be over-active

Being too active when it comes to managing your portfolio could go against you. Most experts typically recommend reviewing your asset allocation about every six months. Bear in mind that every time you buy and sell a fund or stock, you are likely to incur a trading cost and if you trade too frequently, these fees could end up eating into your long-term returns.

But before you give up on an investment, consider why it has disappointed and whether it could do better in the future. For instance, a fund’s management style or objectives could mean it lags for some time before improving as even the most experienced fund managers will have periods of poor performance.

Find out more about understanding buy and hold investing

Sometimes, a fund will change its mandate – its stated aims or objectives – or it could replace its manager. This can cause short-term uncertainty and undermine prices. Decide whether the new mandate, is still suitable for your portfolio and does it still contribute to your long-term aims?

A new manager is generally unlikely to herald a new direction for a fund, but if the remit has changed, does this still suit you? Remember at all times that past performance is not a guide to the future and there’s no guarantee that holdings that have done well will continue to do so.

The importance of rebalancing

Without rebalancing, you may be exposing yourself to unnecessary risk. The parts of your portfolio, which have performed strongly, will naturally become an ever-bigger part of your asset allocation and vice versa, and as a result the asset mix can change. If, for example you’ve enjoyed an equity bull market, the proportion of your portfolio comprising stocks will have risen.

Conversely, if you’ve been riding a bond bull market and equities have done badly, your portfolio may end up being too skewed towards fixed income assets. If you sell some of the assets that have done well and use the money to top up those that have done badly, you can re-establish your initial asset allocation.

Getting into the habit of reviewing your portfolio on this basis will also mean that you are selling high and buying low, a practice that history suggests can be lucrative in the long run – although of course it’d be impossible to achieve deliberately as markets are unpredictable.

Remember that no matter how you tweak your holdings, investments still carry risk. They can fall in value as well as rise and you may get back less than you invest. Also keep in mind that the tax rules governing ISAs may change in future and ISAs may even be withdrawn. In any event, the value of this favourable tax treatment to you will depend on your individual circumstances.