As we kickstart a New Year, there’s never been a better time for fitter, stronger finances and getting your plans back on track. If you are already an investor it can also be a great time to take a fresh look at your portfolio, or undertake to make the most of your money. Here are seven ways to help get your finances in shape.
1. Define your goals
Do you know what your short term and longer-term goals are? Are you saving for a rainy day, to get on the property ladder, a holiday, or your retirement? Having an idea of what you would like to save for will spur you on to save more and set about reaching your goals.
2. Watch out for the investment gap
An ‘investment gap’ opened up over the last decade between those opting for cash savings and investors putting their money to work in assets. Having cash on hand is important for short term needs – six months’ income as an emergency fund is generally considered prudent – but for longer term goals of five years or more it’s worth considering investing. Interest rates are exceptionally low at the moment, and a long way short of rises in the cost of living. Over the long term having more of your wealth invested rather than in cash can help you preserve the spending power of that money and help you meet your goals.
3. Make the most of tax-efficient savings
Saving, particularly for your pension, may not be something you are thinking about right now, but if you don’t you could be missing out. Most people can receive extra money every time they pay into their pension pot through tax relief. Taking advantage of the tax benefits of a stocks and shares ISA by using as much of your £20,000 allowance as possible can also make a difference and offer more attractive returns than a regular cash savings account. While the end of the tax year seems a long way off, now could be a good time to start planning ahead to ensure you beat the deadline of April 5th to use this tax year’s allowances.
4. Ensure your portfolio is diversified
Diversifying – spreading your money between different investments and asset classes – can lead to a less bumpy ride. If one of the investments is performing poorly, another one could be making up for it. Always ensure your portfolio is built of various assets so it is not overly reliant on any one area performing well, particularly if you are anticipating volatility ahead. It’s usually too late to rearrange in the midst of market-moving news.
Portfolios can become out of kilter over time as asset classes rise or fall at different rates. With a surge in markets since the onset of the pandemic in 2020, this may be particularly relevant for investors this year. Rapid appreciation is some areas can mean a portfolio becomes imbalanced and more risky by stealth. Taking some profits and topping up with a little of what has done badly can help keep your portfolio balanced.
5. Stay focused on your strategy
Financial markets can be volatile, and downs as well as ups are part of investing in stock markets. Ignoring short-term market “noise” to keep focused on a long-term investment strategy can be hard. But short-term declines should not detract from the potential of riskier assets to help meet longer term goals.
Trying to time the markets means investors must get two important decisions right: when to get out and when to get back in. This means there is a risk of having to pay a higher price to reinvest, and missing out on any dividend or other income in the meantime. Markets are unpredictable and allowing emotions to drive investment decisions rarely serves investors well.
6. Re-appraise fund choices
It’s worth periodically re-examining your fund choices to ensure they meet your needs and whether you are getting value for money. Fund charges can eat into your investment performance, so the use of low-cost passive funds or ‘trackers’ that aim to follow market indices could help minimise this effect.
Another route is aiming to pick funds with a reasonable chance of long term outperformance. ‘Active’ funds try to beat their benchmarks, though there are no guarantees they will do so and they often come with higher charges than passive funds. Active managers need to justify their higher charges by being sufficiently differentiated from simple, low-cost trackers – usually by holding a significant amount in stocks that are different to the large ones in the index.
7. Get some help if needed
For more complex financial decisions you may wish to consider regulated financial advice. A financial advisor can help assess your existing finances, whether you are on track to meet your retirement goals and help structure your affairs as tax efficiently as possible. Whether you have a specific question about your finances or looking for someone to help you create a holistic financial plan, we can help you.
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