Planning an investment portfolio

Published by Sam Barrett on 14 December 2007.
Last updated on 11 August 2008

How can I plan my portfolio to make the most of my ISA allowance?

Investing your ISA allowance in this year's best-performing fund won't necessarily make you rich. Indeed, this strategy could leave you with a very poorly performing investment portfolio that doesn't suit your investment objectives or your appetite for risk.

Investment Management Association figures show how fund fashions change. While the best-selling sector in 1999 to 2001 was UK All Companies, by 2005 it had fallen from favour and become the worst-selling sector.

Since ISAs were launched, other top sellers have included UK Corporate Bonds in 2002 and 2003, when the stockmarket wasn't performing very well and UK Equity Income in 2004 and 2005.

Then there was the technology blip back in 2000. At its peak almost £100 million flowed into the high-tech sector, but by 2002 this figure had fallen to less then £750,000. More recently, the specialist sector has been a top seller, with property funds a big hit with investors as a result of the extension of the ISA rules to allow tax-efficient investments in these funds. However, investors did lose out in 2007 when the market faltered.

So, you need to ignore the trends and take a broader view of your investments. This will give you a portfolio that suits your investment objectives and lets you sleep at night.

Your risk-profile

Broadly speaking, there are three different types of investor - cautious, balanced and adventurous. Which type you are will be determined by a number of factors. Your own appetite for risk is key and a good way to gauge this is to ask yourself how much of your investment you could lose without fretting about it.

If seeing the value of your investment reduce by 50% doesn't worry you, then you can probably stomach a high-risk investment strategy. But if this prospect brings you out in a cold sweat, then go for a more cautious approach.

Your time-frame should also help to determine your risk profile. If you're investing for a short-term goal, such as paying off your interest-free mortgage in five years, then you won't want to risk a stockmarket fall, so you should go for a cautious strategy. If you're in your thirties and putting some money away for your old age, you can probably afford to ride out the ups and down of the stockmarket.

Likewise, think about whether you can afford to leave the money invested - if you were forced to sell you might have to accept a lower price than you wanted for your investment. And you should also consider whether you want to generate an income from your investment. If you do, you may want to pick income-producing funds in the UK Equity Income or fixed interest sectors.

Once you've decided what sort of portfolio you should have, assess your current investment position. Write down all your current investments, including any cash ISAs and savings accounts, as well as your stockmarket investments. Also note the type of asset it is - cash (which covers savings accounts and cash ISAs); fixed-interest (corporate bonds and gilts); property (which could be a fund or even a buy-to-let property); or UK, US, European, Far East or emerging markets equities.

Once you've categorised your current portfolio, decide what, if anything, you need to switch. You may be able to rebalance your portfolio with your next ISA investment - if your current portfolio is overweight in property, for example, you could realign it by putting next year's ISA allowance into equities or fixed-interest.

Additionally, the new ISA rules - which came into play April 2008 - mean you're able to switch investments in cash ISAs into stocks and shares too. This could be useful if you need to rebalance your portfolio, or if you've shied away from the stockmarket in the past but would like to get some exposure to it now.

This is also an ideal time to check the performance of the funds you already hold in your portfolio relative to their sector.

You shouldn't necessarily pick the top performers, as these can often be volatile and zip from the top to the bottom of the performance tables. Instead, look for funds that are consistently above average over a number of different time periods.

How to switch

Having assessed your portfolio and the performance of the funds you hold, you may need to switch some of your investments to create a more suitable portfolio. You'll incur charges when you transfer, but if you have some poor performers or some funds that don't fit your risk profile it's probably worth paying these.

How much you pay will depend on how you switch your funds. The most expensive way is by going direct from one fund manager to another - you'll pay the full initial charge on the new fund, which could be up to 6%.

A cheaper option is to switch within the fund management group as they will often waive some of the initial charge on the new fund. If your existing manager doesn't have a strong performing fund to switch to, then you can save money by using a discount broker or an IFA. They can often pass on discounts on the initial charge, either by rebating commission, or as a result of the deals they have with fund management groups, by bringing the charge down to 2.5% or less.

Fund supermarkets are a better option. Again, you'll enjoy low charges, with discounts of up to 5.5% on initial. And, as all your ISAs will be in one place, you'll also be able to manage your portfolio more efficiently.

A fund supermarket also allows you to spread your ISA allowance across different funds and fund management groups, increasing your portfolio's diversification.

As well as greater flexibility and lower charges, fund supermarkets also have plenty of information and tools to help you manage your ISA investment. These include portfolio management tools that allow you to tweak your holdings and information about all the funds available.

Moving your current ISAs to a fund supermarket is straightforward. You'll be able to re-register some of them with the supermarket for free. This simply transfers the fund's administration from the existing manager to the supermarket. Not all fund managers allow this, however, so you may have to transfer some funds. The supermarket will manage this process for you, but it will involve selling your existing ISA and then reinvesting it within the supermarket, which will incur an initial charge.

Whether you intend to switch your funds to a supermarket or to a different fund manager, make sure you follow the rules or you could inadvertently lose your ISA's tax-free status. Contact the new manager for a transfer form, which will include details of the ISA you want to transfer. Once the fund manager has this it will arrange the transfer. This process shouldn't take long and your new ISA should be up and running in around 10 working days. Be aware, however, that although you can split previous years' allowances between ISA providers, you must transfer this year's allowance in its entirety.

And remember to review your portfolio at least once a year - more frequently if your circumstances change (for example, if you receive a large inheritance or decide to take early retirement). This will ensure your money is working as hard as possible for you.



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