Could your investments better meet your needs?
Whether our investments have proved stunning successes or dreadful disappointments, there were inevitably reasons why we made them in the first place.
Over time though, our priorities as well as our circumstances can change. This means that our motives for making any of our investments at the time, however sound, may no longer be valid.
Rather than accepting that you probably have a mish-mash of different investments that may no longer be a good fit, you could look to recalibrate your portfolio to align it with your new aspirations and circumstances.
Whether you would now like to squeeze more income from your investments, or if you have become more growth-oriented, there are a range of different assets that could play a part in pursuing your goals. Once you have defined what these goals are, you can get your investments working better for you.
Turn the taps for income
Depending on where you are in life, using your investment pot as a source of income might be appealing. For instance, it could be a useful way to supplement your pension and realise your ambitions in retirement. Not all investments will deliver an income, though, so you may need to reconfigure your portfolio.
While there is a spectrum of assets that can pay an income – bonds, in the form of coupons; company shares, in the form of dividends; and property, through rent – different ones will offer their own propositions that may or may not align with your own income goals. Some assets may generate an income that tracks the rate of inflation, for example, while others may offer the prospect of income growth in the future.
If you are focused on generating a high income, there is typically a trade-off between the level of income on offer today – reflected in what is known as an asset’s income yield, typically representing the income as a percentage of the asset’s price – and the confidence investors widely have in its long-term sustainability. A high-yielding asset may not, in other words, be able to sustain its payouts, perhaps because of a rocky financial position.
To offer solutions to challenges like this, there are income-focused funds that look to manage risks in pursuit of delivering regular or rising distributions to their investors by investing in a combination of assets. Each fund will have its own objective and approach, and these could resonate with your own goals and approach to risk and reward.
Or, go for growth
If you are looking to grow your investments’ value in the years ahead, perhaps over decades, it is important that you take enough risk. Trying to play it ‘safe’ could ultimately leave you without enough money to achieve your future goals.
This may sound odd, but the potential for higher returns is typically the reward for putting your money at risk. However, the longer your investment horizon, the more willing you might be to accept uncertainty, and even embrace it, in return for potential capital gains.
If investment growth is a higher priority than generating income or preserving capital, your portfolio should reflect this. Rather than investing in assets that have limited scope to deliver growth, there could be merit in focusing on those that do. These might be the shares of more innovative companies, and those in faster-growing parts of the world, or perhaps assets that are out of favour but whose value could rise or recover over the longer term. But you must be comfortable with the fact that they come with higher risks.
Depending on your time horizon and your attitude towards risk, there are many investment strategies targeting capital growth that could potentially make a valuable contribution towards realising your long-term financial goals – and possibly those of your family.
Make the most of your ISA
Whether you are pursuing income or growth, you should look to make your investments as tax-efficient as they can be. When you’re putting savings to work outside of a pension, your Individual Savings Account, or ISA, can be a great way to invest.
Under the current rules, we can each invest up to £20,000 each tax year through an ISA. The key reason why you would invest through an ISA is that any capital gains and income generated will be free of personal income tax. Over the long term, this could make a terrific difference to your returns, especially if your investments perform well.
Get an expert opinion
If you’re unsure about the suitability of any of your investments, or how to best structure your portfolio, you should consider seeking advice from an independent financial adviser.
They can play a valuable part in defining an up-to-date investment plan, unique to your goals and needs, and which takes into account your other savings, any other income streams, and other assets like property that you might own.
M&G are unable to give financial advice. The views expressed here should not be taken as a recommendation, advice or forecast.
Remember too that ISA tax rules may change in the future. ISA tax advantages depend on your individual circumstances.
The value and income from a fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested.