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Tend to your investments like a top gardener

14 May 2020

6 minute read

Having a good mix of assets in your pot might help to protect your investments over the long term.

Who's it for? All investors

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:

  • How regular tending of your portfolio might keep it in robust shape
  • Why moving investments in to a tax-free shelter might help them grow faster
  • Where to find investment ideas for your pot.

The annual gardeners’ pilgrimage to the Chelsea Flower Show in London may have been cancelled this year but its followers will have the opportunity of attending a virtual alternative – as well as being out in their own gardens tending to their beds, borders and trees.

Investors would do well to apply some of the methods used by the green-fingered to their investments – and get them in robust shape for the months and years ahead.

By cutting out dead wood or planting new varieties to bring balance to your investments there is plenty of inspiration to be taken from the world of horticulture.

That includes sprucing up the investments you hold for better balance, pruning – taking profits or losses for tax-efficiency purposes; transplanting – putting investments in an ISA to shield them from the taxman; or for those who are seeking income, picking investments that might bear fruit regularly to provide the necessary dividends. Be aware that tax rules can change and their effects on you will depend on your individual circumstances.

Tending your investments

Different vegetation grows at different speeds – and similarly different investment types do not perform in unison.

Even a carefully planned array of investments can start to look a little disorderly over time.

You may have started out with what you might consider a low or medium risk selection but this can mature into something altogether higher risk if one asset starts to dominate too much. You may have felt this over the last few weeks if you had a big exposure to shares at the time of the coronavirus stock market crash when prices tumbled.

Let’s say when you started out you spread your money among 10 funds and one of these has performed spectacularly well. This might be a problem you’re content to live with but it means this fund now takes up a large percentage of your total investment pot. Your portfolio will be overly dependent on how that one investment performs in future. If it withers and dies it will leave your collection looking distinctly lacklustre.

Perhaps you have all your money in UK shares but feel that you should diversify to include bonds or global funds, or for a splash of colour, emerging markets. Or perhaps you have too much allocated to one market sector and feel you need to broaden your horizons. Maybe you want ‘greener’ investments to match your portfolio to your principles?

As you get older and nearer the point you might want to dip into your retirement pot, your requirements are also likely to change. You may feel unable to tolerate stock market swings to the same degree and therefore decide to rebalance the pot so you have more in bonds or cash. You may want to switch to investments paying an income. Dividends are under pressure right now due to the coronavirus crisis but the most robust companies will hopefully be able to get their dividend strategies back on track.

Whatever your situation, the idea is that with a diversified collection of assets, even if some fail to flourish in certain conditions, others should hopefully blossom.

The first step is to review the allocation made to different assets – such as cash, shares, bonds and property, even if invested in through a fund. You need to make sure the balance still fits with the goals you had in mind when you started investing in the first place, or your up to date objectives if they’ve now changed.

You may find you need to cut back some assets, partly switching out of some shares or funds while topping up others to try and keep your long-term goals on track. This can feel uncomfortable if the asset in question is growing successfully – but it can be sensible to ensure a single investment doesn’t start to take over.

But don’t act in haste to weed out certain assets that may have fallen dramatically in value, such as following the recent stock market crash. You will simply turn paper losses into the real thing. By leaving them be, they might recover over time, although this is not guaranteed.

If you have new money to invest, this is a straightforward way of balancing the pot with the careful selection of new investments.

You may believe you’ve spotted certain sectors or assets that might do well in the post coronavirus world, and choose to allocate some money to these in the hope they bloom. At the same time you might want to chop back sectors you feel have been blighted by the crisis.

Whatever your decision on new investments, you may not want to commit the extra cash all in one go. You can take the strain out of timing an investment by drip-feeding money on a regular basis instead. This means your contribution buys more when prices drop – and less when values rise. This can cost more because of paying higher charges on low value regular transactions but avoids the risk of putting a large sum into an investment just before a market dip.

Consider sheltering in a ‘tax’ glass house

If you need to sell assets to restore the balance of your investments be aware of any tax implications. You may need to pay capital gains tax on profits made over the annual exemption for individuals, which is currently £12,300. Tax rules can alter and how these affect you will depend on your individual circumstances.

Of course if all your assets are already held in tax-efficient Individual Savings Accounts (ISAs), this is not a concern as there is no tax to pay on capital gains or income generated. Every adult has an annual ISA allowance where they can shelter investments of up to £20,000 They can be left to (hopefully) bloom out of the taxman’s reach, potentially leaving more of any investment returns for you. Although don’t forget any investment can fall in value as well as rise and you could lose all of your money. Plus tax rules might change in the future and their effects on you will depend on your individual circumstances.

If you hold assets outside an ISA but now want to put them somewhere more tax efficient you could consider ‘Bed and ISA’. This is a way of selling these assets and shifting them into the tax-free umbrella within a few days.

During this process you don’t necessarily avoid a capital gains tax bill (if you sell them for significantly more than you paid for them with profits more than the annual exemption) and there are trading costs involved. But it is a great way to take advantage of the annual ISA allowance if you don’t have any new money to invest – as well as protecting any future gains or income on these investments from tax, though you do have to bear in mind that the ISA rules may one day be changed or revoked all together.

Similarly, putting investments into a pension will give them a chance to grow tax efficiently over a long period – although once invested you cannot access this money until at least age 55 under current rules. The government has been considering proposals to raise the pension access age to 57 by 2028, though this could change.

Find suitable seeds for your investment ideas

If you’re not sure what investments to choose why not look for some inspiration from the Barclays Funds list. This features 34 funds currently, all from leading fund managers, chosen because we believe they have solid reputations and show robust investment processes – and we think have the potential to generate consistent returns over five years or more. These funds give you access to a range of investment varieties focused on a single country, sector or type of asset. By having a sprinkling of different types of fund this can help balance the overall risk of your pot. If one fund faces challenging periods then hopefully this will be compensated for by other funds that aren’t facing the same issues.

If you want to take the hard work out of diversifying and choosing individual investments then you could consider ‘Barclays Ready-made Investments’. These spread your money around many different investments all in one place.

But if you feel you need help deciding where to invest you should seek independent financial advice.

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