Saving & Banking

The importance of a balanced ISA Portfolio

As people’s financial focus starts to shift to plans for this year’s ISA allowance, Saga Investment Services suggests it’s a good time for people to review their investment portfolio to make sure it is working as hard for them as it can be. 

Sam Coppin, director of advised investments at Saga Investment Services, explains five key things to consider this tax year when reviewing existing investment portfolios.

Asset Allocation is key

Once people start to accumulate investments the chances are that these will be of different types. Some will be equities, some bonds, perhaps some property and also some of the more esoteric assets such as commodities (e.g. gold and oil), and hedge funds. This mix is called asset allocation and academic research suggests that it is responsible for 90% of the differences in investment returns. So it’s worth putting in some effort to get this right.  We currently suggest the following split for a moderate risk growth investor:

Regular rebalancing

Rebalancing means bringing an investment portfolio back to its original asset allocation. It may have become out of kilter because, over time, some investments can grow faster than others. It’s useful to rebalance regularly (annually is about right) and, in effect, it makes people sell equities when they are overvalued and buy them when they are cheap.

Invest internationally

UK stock exchange listed companies represent around 10% of global stock markets, so it simply doesn’t make sense to restrict a choice of investments to the UK market alone. These days it’s easy to invest internationally – there are thousands of investment funds available covering most of the overseas markets.

Generally it makes sense to invest as widely as possible – this will deliver some diversification benefits and also allow exposure to the full range of investment opportunities. If people restricted their universe to the UK they would have virtually no exposure to many industries, such as the manufacture of mobile phones, computers, cars, heavy machinery or internet retailers.

However, they would find that they would be highly exposed to financial services and oil and gas companies, as these represent a large proportion of companies listed on the London Stock Exchange. For UK-based investors we suggest that it still makes sense to have the largest allocation to UK-listed investments, because it is likely their living costs will also be in pounds, and then to complement this with a broad spread of international markets. We currently suggest the following geographical spread for a moderate risk growth investor.

Keep costs under control

Costs have a huge impact on future investment values. They are also one of the few factors in investment that can be predicted with some certainty. A 1% difference in annual charges on a £100,000 portfolio could equate to a £60,000 difference in returns over 20 years (based on an 8% annual return*). People should always consider if the investments they hold are delivering good value for money.

*Rate used for illustrative purposes. Investors should be aware that growth rates below 5% are currently considered more realistic for projections.

Tax efficiency

Taxation has the same negative impact on returns as charges so it also needs to be minimised. The most common way of doing this is by placing investments in a tax efficient account such as an Individual Savings Account (ISA) or a pension such as a Self-invested Personal Pension (SIPP).

If someone holds investments outside of an ISA or SIPP wrapper, they could consider a Bed & ISA or Bed & SIPP to shelter these from the tax man. A ‘Bed & ISA’ transaction allows people to sell existing investments and use the proceeds to open or top up an ISA account. They can then choose to buy the same investment back, choose another investment instead, or simply hold the cash within their ISA account.

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