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The importance of managing your portfolio

Whatever your financial goals, it’s vital to regularly monitor and manage your investments.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • Why you must regularly review your investments.
  • Ways to build a portfolio.
  • How to rebalance your portfolio.

If you are comfortable managing your portfolio yourself, it’s essential that you take an active approach to your investments.

You will need to consider not only your personal goals, but also your approach to risk and how long you want to invest for.

Simply buying investments without taking these factors into consideration could mean that your portfolio lacks balance and that you take on more risk than is necessary.

If you aren’t happy picking your own investments, or don’t know which funds are appropriate for your needs, you should seek professional financial advice.

Getting it right in the first place

The investments you choose to hold in your portfolio will depend on your goals, approach to risk, how long you plan to invest for, and whether you already have any exposure to shares.

Collective investments such as unit trusts, Open-Ended Investment Companies (OEICs), Exchange Traded Funds (ETFs) and investment trusts are usually a good starting point as your money is pooled together with other investors’ money and invested on your behalf by a fund manager.

Never just go for the funds that top a performance league table. Unfortunately, past performance is no guarantee of the future, so you shouldn’t select a fund based on backward-looking data.

Instead, research each fund you are considering to see if it is right for your needs, and also look at charges.

Depending on whether you’re invested in actively managed funds or passively managed tracker funds, the costs of fund management can make a big impact on your returns. Investing in active funds means expecting fund managers to achieve better returns than just investing across all investments in a market or index. You’ll need to pay higher fees for actively managed funds. In general, though, funds are a good way to diversify your portfolio and they can be cost-effective. Just make sure you understand what you’re paying and why you’re being charged.

Regularly reviewing your investments will ensure that you know whether they’re on track to meet your financial objectives. The level of risk you’re prepared to accept may change over time which will affect your asset allocation – how you choose to split your money between different types of investments such as shares, fixed-income securities, cash and property.

As time goes on you’ll probably need to make adjustments to stay on course, as the performance of the funds and other asset classes you have invested in will vary over time. This is called ‘rebalancing’, and means your portfolio will have a chance of remaining on target to meet your objectives.

Keeping your investments on track

Rebalancing your investment portfolio regularly is important because it can bring your asset allocation back in line. Over time, asset allocation can change because of the way your investments perform. For instance, you may have 10% of your money in shares, but if they do particularly well, they could account for a bigger slice of your overall portfolio a year later.

The changing value of your investments means that your asset allocation may no longer match your investment goals, so you’ll need to make adjustments.

Things to think about

Monitoring and rebalancing your portfolio is important, but so is not tinkering too much. Investing is a long-term pursuit and monitoring your investments is about watching how they perform and giving them a nudge in the right direction from time to time.

While you need to keep an eye on how your investments are performing and adjust them accordingly, moving things around too often can be unhelpful. Rob Smith, from Barclays Smart Investor, says:

The urge to do something can be very powerful at times, especially when investments aren't performing in line with expectations. However, you need to think about the long-term nature of your goals and not be drawn into short-term actions that damage your portfolio. Each time you tinker you incur transaction costs and these can have a larger effect, especially if your portfolio is relatively small.

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