January detox: Five ways to get your portfolio into shape

The start of a New Year is a good time to review your investments and reset your investment clock. Given the strong bull run we’ve seen for riskier assets, many equity portfolios will be showing some good gains over the last year. But are these weatherproofed against a change in the investment wind? What should investors be looking to do to help make sure their financial fitness lasts beyond the usual New Year resolutions?

1) Removing portfolio bias

One of the first things we notice when clients decide to start using a professional wealth manager is how personal their investments are. That personal bias often means that behavioural biases can creep into their investment approach. So we might, for instance, find that clients may have rebalanced their portfolios to align to the same asset allocation decisions, year in, year out, regardless of what’s been happening in markets.

For example, a key asset class for many cautious and retired investors is UK gilts, as they seek security or income. However, since bond prices have been driven higher by quantitative easing, yields have been depressed and versus inflation are in negative territory – hardly the type of stable returns that any investor is seeking. Instead, a professional would evaluate the investments that are being held and consider taking profits, before reviewing where the potential lies for the right type of alternative portfolio support (be that preservation or growth) and avoiding riskier assets.

2) Beware paper mountains

We have had clients come to us after decades managing their own investments (or spouses who have hitherto taken charge), with a mountain of shares held in an entirely paper-based, certificated format. Over the years this can morph into a complicated administrative burden.

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Moreover, we have also seen clients holding certificates that are no longer valid, making it difficult for them to determine which certificates still have value today. In some cases, they were unaware of the total value of the portfolio. Wealth managers have an important role to play here in helping clients through perhaps difficult times.

3) Don’t run your portfolio like you do your business

Another thing that stands out for me is the sometimes unsustainable approach that many entrepreneurs take towards their portfolio. Even those who have physically separated their business assets from their personal portfolio are often prone to confusing the two and expecting unrealistic returns from their investments. Your business perhaps can grow at 20 per cent a year – although even then foundations may become shaky. That level of return from investments, however, really is unsustainable. As such, it is often a case of guiding clients towards investments able to deliver stable returns that balance risks taken elsewhere.

4) No stone unturned

A new client often hasn’t exploited all the various annual and lifetime allowances due, or in the case of pensions, understood where allowances have been lowered and so may have been exceeded. A total of their contributions, employer matching and long-term investment returns could put them above the current £1 million lifetime allowance. It’s not just a question of stopping paying into a pension, as that may affect other linked benefits. But it is a careful balancing act. Beyond that, there are other allowances that investors can sensibly use to maximise income, from Isas to the dividend and capital gains tax allowances.

5) Consolidate small pension pots

A professional could help consolidate pensions, bringing together several smaller pots that may have built up through a portfolio of careers. Gaining a clear oversight of these funds can lead to greater clarity on diversification; for example, there will be inadvertent duplication when five pensions are all invested in the same large cap UK stocks. In addition, consolidating will help investors to get a better view of the overall level of risk they are taking.

Stewart Sanderson is head of relationship management at Seven Investment Management (7IM). 

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