Investors will often spend a lot of time and effort choosing the right investments for their ISA each year, but existing portfolios don’t always attract the same level of attention. This can lead to your ISA portfolio becoming unbalanced, ill-prepared for
changes in market direction and out of sync with your long-term financial goals. A well-considered annual review can make all the difference.
Reviewing your portfolio isn’t always easy
For a start, it forces you to reflect on your past mistakes – whether it’s the time you decided a niche technology provider was the route to riches, or you put all your money into financials just before a banking crash. Rather than passively sitting back
and hoping an investment will come good, a review forces you to admit you may have backed a dud and make changes where necessary. This may feel uncomfortable but is an important process.
Alternatively, an ISA portfolio review may force you to part with some companies that have been big winners for you. If a stock has done very well, it’s hard to let go, even if it has become very expensive. This has been a significant problem with the technology
sector in recent years. It’s kept doing well relative to the rest of the market and, for those who didn’t trim back their holdings, it has become a higher and higher weight in their portfolios. While this has worked well, it exposes investors to higher risk.
Once-balanced portfolios now contain a chunky bet on a handful of technology stocks.
In both cases, breaking up can be hard to do. It can also feel like the wrong thing to do. Again, technology has felt like the right sector for such a long time that it’s difficult to justify reducing your holdings. However, markets change and if you’ve
let yourself build a significant weight in a specific sector, it can be very painful. Since late 2021, the technology-heavy Nasdaq has
sold off by around 17%. This is despite continued strong earnings from the technology sector.
The importance of diversification
An unbalanced portfolio can be vulnerable. It’s difficult to predict the twists and turns of markets, so being over-exposed to a specific region, sector or asset class can leave your ISA exposed to sudden market selloffs. The banking crisis, for example,
came when that sector looked superficially strong, few predicted the weakness of the mining sector from 2010 to 2015 and now many portfolios have a significant weighting in technology. Markets are cyclical, different areas will have their day in the sun and
it is vital to have diversification and balance.
There is sound research behind the idea of diversification. Modern Portfolio Theory was devised by American economist Harry Markowitz. It argues that the characteristics of each component of a portfolio shouldn’t be viewed in isolation, but for how they
impact on a portfolio’s overall risk and return. It’s possible to construct a portfolio where the overall balance of risk and return is greater than the sum of its parts.
Regular reviews can make sure a portfolio retains its diversification, or mix of assets which can be expected to behave differently from one another. If one sector performs particularly well and becomes a larger share of the portfolio as a result, you can
trim it back, take profits and reinvest in those areas that look better value. In this way, there is a natural discipline of selling high and buying low. With the right investment platform, you can also diversify across direct investment in stocks and shares,
and collective investment funds. This can help make sure you get the best possible blend of assets.
Meeting your goals
Regular reviews also help keep your ISA portfolio on track to meet your investment goals. The type of portfolio that was right for you in your carefree twenties, may not be appropriate as you build commitments in your thirties and forties. Your lifestyle
will change and your investment approach may need to change with it. Regular reviews let you check whether your ISA investments are still fit for purpose and have the appropriate blend of assets for your financial goals at each stage. Do you need more in fixed
income or low risk assets now you are nearing retirement? Or do you feel able to take more risk now you have a higher salary?
A final element worth reviewing is your investment platform. Different platforms have different pricing structures, tools, support frameworks and products. It’s relatively easy to switch and if a platform can no longer deliver what you need, it may be time
to consider your options. In particular it’s worth making sure your platform offers the services, tools and investment options you want and will use at a price that feels fair to you.
Reviewing your existing ISA portfolio may not seem as exciting as planning where to invest your new ISA. However, it can be every bit as important and rewarding for growing your wealth in the long term.