When and why do experienced investors rebalance their ISA portfolio?

Experienced investors want to ensure their ISA portfolio is working its hardest to maximise potential returns and meet their investment goals – but these goals can change over time, as can an investor’s circumstances, or the ISA market itself.

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When this happens, it's time to consider rebalancing your ISA portfolio. Whether that involves lowering its cash weighting due to plummeting interest rates, or looking to incorporate more risk in order to target higher potential returns with the aim of meeting investment objectives in a shorter amount of time. 

And utilising ISA transfers – which allow the transfer of one ISA to another without impacting the ISA allowance – makes it possible for investors to adjust their portfolio whenever needed whilst still retaining their current, tax-free £20,000 allowance.

But first, it’s important to understand when and why it could be time to rebalance an ISA portfolio.


To target higher potential returns 

Most investors want to achieve the highest return possible on their investment. Regardless of whether they are impact-driven and hoping to see much-needed housing built from their investment, or see environmental projects scaled, the focus on returns will still be at the forefront. 

But unless there is a defined rate of return – target or guaranteed – and one that has a place in your portfolio for the length of the investment, it could often be the case that your needs change.

Perhaps the original targeted rate of return no longer aligns with your wider portfolio needs and a higher target rate is now required, or it has not been and is not expected to be met – a scenario that has been the case with the stock market in particular over the last 18 months.

As experienced investors who are willing and able to accept more risk in the search for higher potential returns therefore have access to higher target rates, there is no need for their portfolio to be weighted towards ISA products that are no longer targeting their desired returns. 

For instance, the Cash ISA is offering rock-bottom interest rates at present – after a drop in the Bank of England base rate in response to the Coronavirus pandemic – and because of this, experienced investors could opt to transfer funds held in cash to an ISA product that is uncorrelated with the base rate, such as the Innovative Finance ISA (IFISA). 

And it is possible to transfer just a portion of capital, meaning investors can still retain funds in their Cash ISA for use on a rainy day. 

As an example, an investor holding £50,000 in a Cash ISA from previous tax years could choose to transfer £20,000 into an IFISA – using it to rebalance their portfolio to their current requirements, whilst using none of their current ISA allowance.

It does need to be understood that these are two different products, with the IFISA an investment product (with investor capital at risk) and the Cash ISA a savings product (with capital covered under the FSCS up to £85,000). But the sentiment remains the same – experienced investors don’t need to put up with minimal interest rates if they’re comfortable incorporating a greater level of risk into their portfolio.


To cater to a change in investment timescales

When building an ISA portfolio, timescales are important. Knowing when you will – or anticipate – need to access the initial investment and any returns is crucial, because most ISA products will require funds to be invested for differing periods of time.

But things change. An experienced investor investing for retirement could have subscribed their £20,000 annual ISA allowance from 2020/21 to a Stocks and Shares ISA before later deciding they intend to retire within three years. 

Knowing that it’s advisable to invest into the stock market for a minimum of five years – allowing time for falls in value to recover – the investor could choose to transfer to an IFISA with a fixed-term of two years. 

Though their capital is still at risk, by moving from the volatile nature of stocks and shares to the likes of fixed-term property bonds, there is now an expected return date that aligns with their new set timescale.

However, it’s important to be aware that it is sometimes not possible to transfer from one ISA product to another without incurring penalties, or at all. This is the case when the ISA is fixed-term – as the IFISA most often is – and it hasn’t reached its maturity date. With each provider having their own rules and procedures in place regarding this, it’s vital you understand the possibilities at all times.  


To match changes to risk appetite

One of the core deciding factors when considering ISA options, even an investor's risk appetite is subject to change – and if it does, altering the ISA portfolio’s weighting to match the change is imperative.

Once-cautious investors who opted for the low risk, Financial Services Compensation Scheme (FSCS) protected Cash ISA could see their financial situation change, and so geared with advice from an independent financial advisor, may choose to add more risk into their ISA portfolio. 

For example, an experienced investor who once had dependent children could have £100,000 sat eroding in a Cash ISA as it was once important for them to have instant-access to all of their funds. But as their children have now left home, it is time for them to transfer a portion of their cash to higher risk investments – with the aim of maximising their capital for later life. 

But the opposite could also happen. Professionals with their portfolios weighted towards the IFISA and Stocks and Shares ISA who are nearing retirement could choose to increase their Cash ISA weighting to ensure instant-access to guaranteed capital is available when the time comes. 

This clearly reduces the level of return they will be targeting, but can be just as important a move as the opposite – sometimes settling for lower rates of return for a portion of your portfolio is just as crucial as targeting higher rates for another portion.


Rebalancing your ISA portfolio

Disillusioned with all-time low interest rates, moving from a long-term investment to a medium-term, or altering the portfolio weighting towards higher risk investments – whatever the reason, rebalancing your ISA portfolio to better cater to your needs is crucial.

And with ISA transfers on hand to make this process simple, as long as there is clear understanding of the situations in which rebalancing becomes an important consideration – and comprehension of how doing so is beneficial – you are on the right track to maximising potential ISA returns.