Seven New Year resolutions for investors

04.01.2008

by Tim Bennett

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Although no one can predict with any certainty what 2008 will bring, one thing’s for sure – thanks to the credit crunch, the outlook for the global economy is far gloomier than it was this time last year.

So it’s more important than ever to avoid squandering cash on unnecessary taxes and fees, and to make sure you are investing as efficiently as possible. Here are some New Year’s resolutions for your portfolio.

1. Don’t forget your Isa allowance

The government spends most of its time trying to take money from you, so on the rare occasions that it offers you the chance to get something back, it’s daft not to take advantage. An Individual Savings Account (Isa) wrapper can minimise the two taxes that do the most damage to your equity returns: income tax on dividends, and capital-gains tax on profits when you come to sell.

You are allowed to save up to £7,000 into an Isa in each fiscal year – the current one ends on 5 April (for next year, you’ll be able to save up to £7,200). Investments held within an Isa are then protected for as long as they remain in the account.

If you have yet to use this year’s allowance, the options are either to buy £7,000 of shares in one go, or drip feed smaller amounts up to the annual limit. But remember, the rule with Isas each year is “use it or lose it”, so if you haven’t set one up yet, get cracking. Also think carefully before closing an existing Isa as you won’t be allowed to reopen it should you change your mind later.

2. Use your capital gains allowance

Any UK resident who sells shares (or investment property) is entitled to an annual allowance, which means the first £9,200 of any profit made is free of capital gains tax. But you can’t use carry it over if you don’t use it. Fortunately married couples can ‘bed and spouse” - one spouse sells the shares and the other then buys them straight back.

It may sound a bit odd but the effect is to crystallise the capital gain on disposal, which is then absorbed by the annual exemption, without getting rid of the shares. The end result is a reduction in the amount of capital gains tax that is paid by the couple once the shares are eventually sold on to a third party. Married couples should also consider splitting the assets they own between them so that two allowances are available each year rather than just one.

3. Get the best deal from your broker

Changing financial services providers can be a hassle, so it’s tempting to stick with who you know. But a New Year review could save you money. The internet has seen vast growth in the number of cheap and simple “execution-only” stock brokers out there, who give you no advice and simply charge for the cost of carrying out trades. But that cost can range from as little as £6.95 per instruction (for regular deals at E*TRADE) to more than double that.

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So consider what services you need, especially in relation to dealing in foreign stocks – are you really going to be buying individual Japanese shares, for example, or would a UK-listed broad-based exchange-traded fund or investment trust suit you just as well? Then check how much you are already paying, and see if you could get a cheaper deal elsewhere, using a site such as Fool.co.uk.

4. Consider membership of CREST

As the Pacific Continental Securities bankruptcy last summer highlighted, brokers who lump together shares bought for clients in an anonymous “nominee” account may struggle to identify yours if things go wrong. Ask your broker about “personal membership” of CREST, which means any shares you buy through them are securely registered in your name rather than that of a “nominee” chosen by your broker. This will save you worry if your broker runs into trouble.

5. Learn about spreadbetting

With markets becoming increasingly volatile, spreadbets offer an easy way to place tax-free punts on a raft of well-known shares, sectors and indices, plus some less obvious things, such as the outcome of cricket matches and even general elections.

For example, a daily up-bet on the FTSE 100 placed with the index at 6,300 points makes £200 tax-free if the index subsequently closes at 6,320 with a stake of £10 per point (6,320–6,300 x £10). But remember, you could easily lose the same amount or more if the market moved against you.

Opening an account takes around half an hour, and with a huge number of UK brokers to choose from, commissions on a bet such as this – known as bid-to-offer spreads – can be as low as two “points”, or £20. Novices should always place stop-losses to prevent backfiring bets costing them a fortune. For more on spreadbetting, see: How to profit from market turmoil.

6. Become a disciplined investor

According to US firm Edward Jones, over the last 36 years the average annual return from equities was 7.6%. However, missing the best 30 days in that period reduces this to 4.0% and missing the best 60 days to 0.2%. But how do you know when a “best day” has arrived? Trying to catch them requires regular research and lots of time and is still by no means guaranteed. The best bet to skew the odds in your favour is to commit regular monthly amounts to a range of shares (index-tracking ETFs are useful for this) rather than investing irregular lump sums on a whim.

7. Reinvest dividends

The Barclays Gilt-Equity study shows that £100 invested in UK shares in 1899 would have grown to an inflation-adjusted £279 by the end of last year without dividends. Factor in reinvested dividends, however, and that figure rises to an impressive £4,061.

So it’s pretty clear that squandering dividends by not reinvesting them will cost you dear in the long term. Check where yours are going – if the answer is straight into your bank account, then ask your broker about a reinvestment plan instead.

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