Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, as part of Morningstar's Guide to ISAs, Pensions and Tax-efficient investing Adrian Lowcock, head of investing at AXA Self Investor suggests a ten-step plan that will provide a framework upon which you can decide where to invest this year's money.
Know Your Goals
What do you want to achieve with your investments? It is essential to know your short and long term goals and keep reviewing them and revisiting them each time you review your portfolio.
Understanding Risk
Risk in investing is more complicated than most think. This is because risk and our attitude to it changes over time. If we are making money we are more likely to become confident and place greater trust in our own decisions. Whilst when we are losing money we losing money we get fearful and panic which leads to making rash decisions such as selling instead of buying. Learn to recognise your changing attitude to risk and rein it in, don’t let emotion drive investment decisions.
Diversification
This is one way to manage some risk in your portfolio. By holding investments across a wide range of asset classes you reduce the risk of one area having too much effect on your portfolio.
Review Your Portfolio - Asset Allocation
Over time different assets perform differently; some will rise faster than others, while others will be falling. The overall effect is that the asset allocation of your portfolio will no longer look like it used to. Over time these variations can significantly change the risk of your portfolio.
Review Your Portfolio - Fund Performance
This is the second stage of a portfolio review. Look at whether the funds you have in the asset class are doing a good job or not. Every manager has periods of underperformance so it is important to understand why. Check the managers and fund objectives - do they match the actions of the manager? A sign a manager has gone off the boil is when they change their approach it shows a lack of confidence in their processes. Check each fund’s investment style and approach to risk. Ask does this fit with the other investments in your portfolio.
Consolidate Holdings
It is easier to monitor your portfolio if it is all in one place. Consider moving to one platform. Re-registration between platforms is available so you don't even need to sell. However some platforms will try to prevent you from leaving by imposing exit fees so check before you transfer.
Know Your Allowances
In the current 2015/16 tax year each adult can put up to £15,240 into an ISA which can either be placed into cash or stocks and shares. For a monthly saver that means you can invest up to £1,270 per month.
Get Value for Money
Shopping around for the right platform will save you money. Some platforms charge a flat fee of 0.5% or more and have a host of additional charges. Look out for incentives and offers.
Don't Hold Too Many Funds
Diversification works up to a point, beyond which there is little, if any, additional gain, just a lot more work. It becomes more difficult to identify what is driving performance of the portfolio. A typical portfolio should have between 10 and 20 funds, beyond this the holdings will not contribute significantly to performance.
Don't Follow the Herd
Too many investments are made based on current trends and expectations, not what may happen in the future. These trends tend to be overvalued and often short term in nature. Instead invest in funds you understand which suit your goals.
Buy Low, Sell High
It is human nature to avoid investing in stock markets when they have fallen or risk seems the greatest. Buy low sell high is an obvious mantra but few investors actually do it. When markets are low their confidence is also low so they wait. But this is the time you should be diving in.
Disclaimer
The views contained herein are those of the author(s) and not necessarily those of Morningstar. If you are interested in Morningstar featuring your content on our website, please email submissions to UKEditorial@morningstar.com
