Spring clean your investments the Marie Kondo way
20 March 2019 is the first day of spring. It's also just two and a half weeks from the end of this tax year. So what better time than now to spring clean your investments – especially if you have yet to make a choice as to where you will be allocating this year's ISA or pensions allowance?
But where to start? Perhaps we should take a leaf from the book “The Life Changing Magic of Tidying Up” by Marie Kondo.
If you haven't already come across her written work, Kondo is a best-selling author and an 'organising consultant' – yes that job title does exist. And you may well have stumbled upon her Netflix series “Tidying Up with Marie Kondo”, which is all the rage at the moment.
She aims to help you declutter your home by sorting through your belongings by category, not by room, as many do, and help you to keep only the things that 'spark joy'.
Applying this to our investments is remarkably easy and – dare I say it – sensible.
1. Commit yourself to tidying up
Set aside some time to get all your documentation together and make sure you won't get distracted. It's never going to be the most exciting task on your list – and most of us will be tempted to leave it until another day (or sometime never) - but it will be worthwhile in the end.
2. Imagine your ideal lifestyle
This is a great way of thinking about your end goal – do you want a big wedding or a small one? Do you want to pay off your mortgage ten years early? What kind of retirement do you want? That will then naturally lead you to thinking about how to finance your goals.
3. Finish discarding first
When reviewing our portfolios, an easy place to start is with the obvious: the funds that are consistently letting us down. At Chelsea, we recognise that all fund managers will have a bad year now and again but, if that year turns into three or more, then it's probably time to take action. Each year we compile our RedZone: a table of funds that have consistently underperformed their sector average over at least three years. This might be a good place to begin.
4. Tidy by category, not location
Once some serial underperformers have been discarded, it's important to make sure you have a holistic view of all your investments. Don't just think about your stocks and shares ISA portfolio – what about your cash ISA, work pensions (previous employers and current), private pension, and anything held outside a tax-wrapper?
Get all your statements together and think of your investments as a whole. Then group the underlying investments together to get a cleaner view: maybe look at your UK equity holdings, overseas equity holdings and your bond holdings, etc. This will also give you a better idea of how diversified all your investments really are and help you eliminate any unwanted biases.
5. Follow the right order
Kondo tells us to look at the least sentimental things first and the most sentimental last – then we won't get distracted for hours reminiscing. So if you have an emotional attachment to a fund or a stock, perhaps leave that until last.
6. Ask yourself if it sparks joy
This last step needs to be approached with care when it comes to our investments. Obviously a fund that doubles in value over 12 months is going to spark more joy than one that increases by say just 2%. But we need to put the fund into context: what is its role in our portfolio? And a 2% rise (that can also be compounded) might be great if everything else fell by 10%!
So perhaps a better way of thinking about this final step is: what does this investment add to my portfolio? Anything or nothing?
Another thing that can spark investment joy is keeping all our gains. So make sure that as much of your portfolio is sheltered from the tax man as possible.
Finally, and importantly, be honest with yourself about each investment. Would you buy it again today?
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Sam's views are her own and do not constitute financial advice.