Get 2018 off to a good start

David Prosser offers three suggestions for a review of your personal finances.

If getting to grips with your savings and investments isn’t one of your New Year’s resolutions for 2018, add it to the list. Conducting an annual review of your personal finances, including your investment portfolio, is a good idea for all of us and January is the perfect time to do it; you’ll have three months of the tax year remaining to attend to key action areas.

Think of this process as an investment detox. Many people’s portfolios contain funds that shouldn’t be in there – either because they’re outright bad for you, or because they’re not appropriate for your life goals. Now is the time to weed them out and get back on track. Equally, if you’re paying too much tax on your investments, you’re missing out on the full benefit of financial healthy living.

Review and rebalance

Start by looking at all the funds in your portfolio, including both investment companies and open-ended vehicles, reviewing their performance relative to their peers. Where funds are underperforming, has this been a consistent trend over several years or a flash in the pan? Can you pinpoint a reason for the underperformance – a change of manager or a style that is out of fashion in current market conditions, perhaps – and is there good reason to expect a pick-up?

Chopping and changing your portfolio too often will incur costly charges and stock market funds should be considered long-term holdings. Nevertheless, if you’ve lost faith with an underperforming fund, don’t be afraid to move your money elsewhere.

You also need to review your portfolio against your individual objectives. The funds you hold should reflect the goals you’re trying to achieve and your attitude to risk, but your asset allocation is bound to have changed since you last reviewed your portfolio. If 75 per cent of your portfolio is supposed to be in equities and 25 per cent in fixed income assets, say, the fact these asset classes have delivered different returns over the past year will mean you’ve moved away from this split.

Assuming your original strategy remains appropriate for your needs, you may now wish to rebalance your portfolio, particularly if you’ve moved some way away from your original asset allocation – by more than a few percentage points in each case, say. You can make partial disposals of the assets to which you are now over-exposed, using the funds to top up areas that are below target.

Cut your tax bill

The rebalancing process should also give you a good basis for making decisions about how you will use your 2017-18 individual savings account allowance in the run-up to 5 April, the final day of the tax year. This year, you can make investments of up to £20,000 inside an ISA, where all income and profits are tax-free, but use that allowance to underpin your broader investment goals rather than in isolation. That way you’ll end up with a portfolio inside and out of ISAs that reflects your needs, rather than a collection of oddball funds that were in vogue from one year to another.

Alongside this process, it may make sense to use your annual capital gains tax allowance to protect yourself from future liabilities. You’re entitled to make up to £11,300 of capital gains this year with no tax to pay and using this allowance annually can be a good way to ensure you’re not building up a hefty tax liability. For example, consider realising gains up to this allowance and using the proceeds to fund ISA or pension contributions.

Wealthier investors with tolerance for higher-risk assets may also want to consider venture capital trusts, which offer generous tax relief; investors’ money goes into a portfolio of small, early-stage unquoted companies. You can invest up to £200,000 in VCTs in any one tax year, but funds may only remain open to new investment until they raise a certain amount.

Get advice and proceed with caution

If you’re not sure how to review your investments, make new choices or mitigate a potential tax bill, consider taking independent financial advice. An IFA specialising in investment will help you build a portfolio suited to your individual needs and is duty-bound to consider products from right across the marketplace. Adviser-driven purchases of investment companies, for example, hit record levels last year.

Finally, don’t assume you have to make very sizeable investments in one go. Regular savings schemes, offered by most investment companies, allow you to contribute as little as £25 a month, inside or out of an ISA. Over time these sums build up to considerable sums - regular savings can be a good option whether you don’t have a lump sum to invest or if you are nervous about the prospects for the stock market.