See Week 1 tips | See Week 2 tips
Day 13: Conduct a "quick and dirty" portfolio check-up
Degree of difficulty: Easy to moderate
Week 1 of my financial fitness programme helped you gear up, first by checking up on your household's financial health and then by getting organised. The tasks in week 2 focused on investing well for short- and intermediate-term goals. In the last two weeks of our financial fitness regimen, we'll focus on a key concern for most investors: Successfully building and monitoring a long-term portfolio.
A good starting point is to take a snapshot of where your portfolio is right now, with an eye towards flagging any notable trouble spots. The best tool for the job is Morningstar's Instant X-Ray. Simply plug in tickers for each of your holdings (use CASH for cash), then hit "Show X-Ray" for a look at your portfolio's stock/bond/cash mix and breakdown by investment style, sector, and geography, as well as any stock overlap.
That's a lot of information, so as you digest it all run through the following checklist and take notes as you go along:
1. Is your stock/bond/cash mix in line with your targets? (Don't have targets? Look here for guidance.) Take note if your allocation to any one asset class is more than five or 10 percentage points higher or lower than your targets. If it is, it's time to rebalance.
2. Are you making big, inadvertent sector bets? Compare your weightings to the FTSE 100's (provided in X-Ray). Again, look for big bets of five or 10 percentage points or more.
3. How about investment-style bets? Are you spreading your bets between large value, large blend, large growth, as well as mid-cap and small-cap offerings?
4. Is a big share of your portfolio in a single stock? To see, click on the "Stock Overlap" tab. Positions amounting to five or 10 percentage points higher or lower than your targets can ramp up your portfolio's risk level.
5. Do you have an adequate emergency fund? Make sure you have a bare minimum of three months' worth of living expenses in a cash or cashlike vehicle.
If you have extra time, click the individual security names at the bottom of the main X-Ray page to see data and analyses for the funds in your portfolio.
Day 14: Check up on the quality of your company retirement plan
Degree of difficulty: Moderate to difficult
If you're employer offer to match your company pension plan contributions, it's a no-brainer to invest at least enough to earn the match otherwise you're leaving free money on the table. But what if your company isn't matching, or you'd like to make a larger contribution to your retirement than you're being matched on? Is it best to stick with the company pensions plan or turn to another vehicle like an Individual Savings Account or Self-Invested Personal Pension?
The answer to that question depends, at least in part, on the quality of your plan. To help determine whether your plan is worth investing in or a is a stinker, ask your HR administrator or pension provider for a summary plan description, which lays out crucial information about your plan such as administrative expenses, whether you have access to a brokerage window (which allows you to invest in options outside the plan), the ability to take a loan, or the ability to make additional contributions.
After reviewing these 'bells and whistles', conduct a quick check-up of the breadth and quality of your plan's holdings using the data and Analyst Reports on Morningstar.co.uk. Look for a good array of core-type funds: large-cap UK and international stock offerings, balanced funds, and core intermediate-term bond funds. For stock funds, look for expense ratios of 1.5% per year or less, though specialised funds like international and small-cap offerings may charge a touch more. For bond funds, aim for expense ratios of 1.25% or less. Read Morningstar's Analyst Reports for a quick check-up on the quality of the options in your plan.
If your plan checks out well on the above measures, funding it up to the maximum allowable level is apt to be a good use of your cash, thanks to the tax-deferred compounding that company-retirement plans afford. Before doing so, however, you may also want to deploy some of your retirement assets into an ISA, which offers the opportunity for tax-free withdrawals in retirement.
Day 15: Make the most of your pension plan
Degree of difficulty: Easy
During the recent recession, many companies reduced their pension-matching contributions or even eliminated them altogether. (This case study offers some valuable tips for dealing with such a situation.) If you're not earning any matching funds on your company pension plan, you can of course continue to make your own contributions or you could instead invest in an Individual Savings Account (ISA) up to the maximum allowable level--this level is changing come April and has already increased for the over-50s.
You can put anything you'd like into an ISA and enjoy tax-free compounding and withdrawals--you can earn interest on your money and capital gains on your investments without incurring any tax liability, even if you’re paying income tax at 40%. If you find yourself with additional assets to invest after making the most of ISAs, return to your pension (provided it's a good one!).
Even without your employer matching your contributions, it's worth remembering that the UK government actually rewards you for paying into a pension by adding to your investment in the form of a tax rebate, which is paid straight into your pension plan once you’ve made your contribution. So for every £80 you put into your pension, HM Revenue and Customs will put in an extra £20. If you are a higher rate tax payer then you can claim a further £20 through your tax return, which means that for every £100 that goes into your pension you’re only contributing £60 of your own money. This is the case whether you are investing in a company pension or a personal pension.
If you're investing in a personal pension, Self-Invested Personal Pensions (SIPPs) have become more popular due to their low costs--some are so low that they do no even include set up charges or annual administration charges. SIPPs allow you to invest in a far broader range of investments that are not permitted in normal personal pensions such as futures, options, REITs (real-estate investment trusts) and unquoted shares. (This case study helped one Morningstar reader seek out suitable SIPP investments.)
Whether you're investing in ISAs, an occupational pension or a personal pension, be sure to take advantage of pound-cost averaging to smooth out your returns going forward. Just because your employer may have ceased contributions, doesn't mean you should too--making regular payments whatever the weather forces you to avoid the poor decisions most people make when trying to time the market. Read more on the benefits of pound-cost averaging here.
Day 16: Maximise the benefits of an ISA
Degree of difficulty: Easy
Placing investments in an ISA tax efficient “wrapper” means that any growth from an investment held within an ISA will not be liable for capital gains tax, and any interest gained from either cash or bond holdings within an ISA will not be liable for income tax.
The total amount that can be placed in an ISA for the 2009/10 tax year is £7,200, though this ceiling was raised to £10,200 for savers of 50 years or over back in October and will apply to all savers from the start of the new tax year (April 6, 2010). This amount can either be invested entirely in a stocks and shares ISA, or up to half the total amount--£3,600 in 2009/10 and £5,100 in 2010/11 (or this year if you are currently over 50)--can be placed in a cash ISA.
You can only take out one ISA per tax year but over time you can build up a portfolio of ISAs spread over multiple years.
So, what types of investments should you put in an ISA? If you have most of your retirement assets in a company-retirement plan and are using a stocks and shares ISA to supplement what you already have, you can use your ISA in one of two ways.
You can hold core-type investments, which tend to be mainstays in most occupational plans: index stock and bond funds, large-cap actively managed funds, balanced funds, and so forth. Or you can use the stocks and shares portion of your ISA to fill holes in your retirement plan. Morningstar's Instant X-Ray tool can help you see where you've got holes in your existing asset mix. You can then research funds that are eligible to be placed in an ISA wrapper by using our ISA Fund Quickrank.
You can use your ISA to further diversify your investment portfolio by holding investments such as authorised investment trusts and life insurance products as well as exchange-traded funds, gilts and corporate bonds. All of these investment types do a good job of diversifying a portfolio that's composed primarily of conventional stocks and bonds, particularly as ISA investments are sheltered from taxation.
Recent government statistics show that over 19 million people in the UK currently have an ISA but only a little more than a quarter use their full ISA allowance--that's 14 million people missing out on tax-free savings, not to mention those that don't yet use these investment vehicles for saving.
Day 17: Look to target-date funds for cheap asset-allocation advice
Degree of difficulty: Easy
One other idea (another "quick and dirty" one) is to look for asset-allocation guidance via some of the target-date funds geared towards people in your age range. Target-date funds aren't perfect, as evidenced by the big 2008 losses incurred by certain overly aggressive funds geared toward investors getting close to retirement. But looking at a few different target-date series can help you get a sense for what's reasonable.
Target-date funds have been around since 2000 in the UK and you can currently find data for 79 target-date funds on our Fund Quickrank (simply search by target-date category).
Continue to check back for more tips over the coming weeks.
