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 2023 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. We don’t know how things might change after the Spring Budget on 6th March, but with important allowances frozen or cut things are already getting harder.

The income tax personal allowance, the slice of income on which no tax is paid, is set to remain frozen at £12,570 until the 27/28 tax year. Meanwhile, investors will see their Capital Gains Tax (CGT) allowance falling again to just £3,000 a year from April, down from £12,300 a couple of years ago, as well as a much-diminished dividend allowance which falls by half from £1,000 to £500 in the new tax year.

This could mean a significant tax bill for those holding income-paying 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.

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 and account for a larger percentage over time. 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 have put on a little weight over Christmas, portfolios may have been swelled by exposure to the tech heavyweights (or the US more generally) in the run up to the year end. Trimming back may be sensible, especially if 2024 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 yields much higher now they can be a shock absorber in portfolios and important diversification in the event of a nastier economic downturn than expected, and interest rates fall more quickly than widely supposed.

This scenario, which could be tricky for many parts of the share market sensitive to growth, would likely be more positive for high quality bonds. Plus, with yields north of 4% there is a cushion against weakness in capital values if inflation and interest rates remain higher than anticipated. Follow the link for more on bonds, including how they work and investment options to consider.

4. Consider whether you are holding too much cash

Savings accounts, Cash ISAs and NS&I products saw renewed popularity in 2023. 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. Today savers are benefiting from some of the highest returns in almost two decades as well as easy, digital methods of moving money around.

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

But are today’s eye-catching cash rates providing a false sense of security? They may have doubled compared with just a year ago, and competitive ones just about offer a ‘real’ or inflation-beating return right now, but that’s as good as it gets. They don’t drive wealth forward over the long term, and we may now face an environment where rates on cash are likely to fall and investments become more appealing as inflation subsides and interest rates are cut. Getting the right balance of cash for short term and investments for long term is an important decision for the coming year.

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.