Five New Year’s resolutions for investors

The start of the year is often a time for resolving to get fit, eat more healthily or give up that evening glass of wine. It can also be a great time to aim for fitter, stronger finances to keep your plans on track, and following some significant market moves over the course of 2024 it’s worth taking a fresh look at your portfolio.

In the spirit of ‘out with the old and in with the new’ here are five New Year investment tips worth considering.

1. Make use of tax efficient allowances

The tax net continues to close on investors following the Autumn Budget, and with important allowances frozen or cut things had already been getting harder.

The income tax personal allowance, the slice of income on which no tax is paid, is set to remain at £12,570 until the 27/28 tax year. Meanwhile, other important allowances such as the dividend allowance, the personal savings allowance and the starting rate for savings are also frozen.

Elsewhere, investors have seen Capital Gains Tax (CGT) rates rising to 18% and 24% on shares and other assets alongside the much-diminished annual CGT allowance of £3,000. This is down from £12,300 only a couple of years ago.

This could mean a significant tax bill for those holding investments outside a tax efficient Individual Savings Account (ISA) or Self Invested Personal Pension (SIPP) and underlines the importance of using these wrappers as far as possible. There’s no tax on investment income or gains within these and you won’t have to worry about the reporting of investment returns from interest, dividends or profits.

2. Ensure your portfolio is diversified and rebalance if necessary

Diversifying, spreading your money between different investments and asset classes, can lead to a less bumpy ride for your portfolio. If some of your investments are performing poorly, others could be making up for it, and it’s usually too late to change things amid market-moving news.

Diversification also shouldn’t be taken for granted. Portfolios can become out of kilter over time as the values of asset classes rise or fall at different rates. You may find that certain stocks, funds, or asset classes have outperformed better than others and account for a larger percentage of your portfolio. It can be prudent to reduce exposure to these areas and redistribute to others to maintain an appropriate level of diversification and risk.

Just as many of us might put on a little weight over Christmas, portfolios may have been swelled by exposure to the tech heavyweights (or the US more generally) over the course of this year. Trimming back may be sensible for prudent risk management, or if 2025 turns out to be a year when stock market performance is broader based.

3. Take a second look at bonds

Many private investors largely ignore one of the most important assets classes: bonds. Also known as ‘fixed income’, bonds represent the debt of companies, governments, or other institutions. They typically pay a fixed amount of income each year (known as the coupon) and repay the original capital (the principal) at the end of a specified term.

It’s fair to say bonds have had a turbulent ride over the past few years, and investors will have done well to avoid them as interest rates and inflation expectations rose. However, with far more generous yields available, they might be a shock absorber in portfolios, and provide important diversification, in the event of an economic downturn and if interest rates fall faster than widely supposed.

4. Consider whether you are holding too much cash

Savings accounts, Cash ISAs and NS&I products have seen renewed popularity in recent years as interest rates have become more attractive. There has been something of a cash revolution with platforms such as Charles Stanley Direct Cash Savings making it straightforward and rewarding to actively manage cash.

For an emergency fund and for any near-term planned spending there is no alternative to cash. For shorter term needs it’s just not worth taking the risk of market volatility, so it’s good to know there’s at least a fighting chance of retaining spending power in cash as inflation recedes and interest rates remain relatively elevated.

Yet with interest rates having peaked some people may be in danger of keeping too much in cash. Although it’s currently possible to generate an inflation-beating return, especially before tax, there is a danger of not fully harnessing the wealth-building potential of investing. Although capital is not secure, shares and other assets have a much better record of growing your money over longer periods.

With rates on cash likely to fall a bit as 2025 unfolds it could be an opportune time to check your balance between the two.

5. Get some professional help if needed

You don’t have to face quandaries surrounding your investments and wider finances on your own. Whether you have a specific question, would like your current portfolio assessed for imbalances or are looking for someone to help you create a detailed financial plan, we can help.

For more complex financial decisions you may wish to consider full, regulated financial advice. A financial adviser 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. Alternatively, if you simply have some questions that need answering, to help you think clearly about your next steps, our Financial Coaching can provide the confidence you need.