Diversity is the key to holding a successful financial portfolio
IT IS so easy to acquire a jumble of disparate investments over the years that do not form a coherent plan. With spring definitely in the air, now is the time to review all holdings, judge if they make money sense and create a financial portfolio that reflects your personal needs and aspirations.
Start by putting some cash aside for any emergencies. This may be for healthcare with many now self-funding instead of paying expensive medical insurance or perhaps to protect in the event of income loss, particularly if self-employed.
Choose an instant access account for this provision. Most of the best interest rates are currently offered by challenger banks such as RCI and Shawbrook. An alternative route is to use a current account which pays interest, such as Santander’s 123 which pays 1.5 per cent up to £20,000 plus a one to three per cent rebate on direct debits for a monthly £5 fee.
Diversity is the key to successful investing. This means multi-asset with a good spread in terms of geography and sector. Consider your attitude to risk. The financial world currently identifies this through five profiles:
Cautious, focused on capital preservation, protecting against the effects of inflation but generating modest investment returns over the long term
Moderately cautious for steady returns but less risky than more adventurous profiles
Balanced which generates some income, holds defensive assets and seeks long-term capital growth
Moderately adventurous, focused on higher long-term returns, highly diversified with greater proportion in commodities, equities and property
Adventurous goes for all out growth with the majority of investments in equities, higher risk and wider fluctuations in capital values.
All investments contain some element of risk. Many think, for instance, that building societies must be solidly sound and yet two – Manchester and West Bromwich – abruptly stopped paying interest on their permanent interestbearing shares. In March, Aviva announced it would cancel its preference shares which were sold as “irredeemable” although it withdrew under pressure.
Decide how soon income needs to be taken. If dividends can be reinvested, the results can be markedly different. Taking the FTSE100 index of leading shares quoted on the London Stock Exchange, the rise has been 17.2 per cent over five years but 40.9 per cent with dividends. Over a decade, the equivalent results are 21.7 per cent and 76.5 per cent.
In order not to be unbalanced, look at where any pension funding is invested. Whilst the individual is in the driving seat for a self-invested personal pension (SIPP), it may take some detective work to find what underlying assets are in collectives and how each has performed.
For those with work pensions, look at the annual report and ask the manager if further information is required. This is to ensure that exposure is not too high in one or two areas. If help is required or simply a professional check on your plans, seek an independent financial adviser or wealth manager.
Check with the regulator, the Financial Conduct Authority, that your intended specialist is authorised. Do not be surprised if leading firms offer several advisers as each will have expertise in their field.
Some wealth managers offer ready-made, well researched portfolios that will meet your risk criteria. Seven Investment Management is a leader in this field. On the ‘moderately adventurous’ selection, typically 18 per cent may be fixed interest, 63 per cent in equities and the balance in other asset classes.
Above average growth may come from the small allocation in emerging and frontier markets.
‘Defensive’ assets are typically government bonds and gold, which usually work in a contrasting way to equities.
Property is frequently overlooked and yet is a key part of the economy. The high amount allocated by leading friendly societies, such as Sheffield Mutual with 46 per cent, explains the continued success of their with-profit funds. Apart from individual companies, collectives are available, such as Fidelity Global Property and M&G Property Portfolio.
For tax efficiency and to maximise returns, place as much as possible in an Individual Savings Account (ISA), pension, Enterprise Investment Scheme, Tax-exempt Savings Plan and Venture Capital Trust.
Do not become obsessed with charges as it may be better to have a higher performing asset that incurs an enhanced fee than a poor performer with a small fee.
An exception to the latter is a passive index-linked fund where it is difficult to find a stock picker who can out-perform.
The S&P500 follows America’s largest public companies and is weighted by market capitalisation. Use a discount broker like Hargreaves Lansdown to reduce costs.
To cut risk, ensure the fund does not lend and that it physically purchases stock and does not use a synthetic approach, such as derivatives.
Too many overlooked the savings plans offered by friendly societies. They are designed to run for at least 10 years but can be for much longer. Up to £25 monthly or £270 annually can be invested, even though the figures do not equate. For a better return, opt out of insurance cover.
For income seekers, the annual return needs to be at least 3.3 per cent to match the Retail Prices Index, down from last month’s 3.6 per cent.
Many of the highest paying UK companies – notably in energy, postal services and water – are at risk from nationalisation if Labour should take office. It may be prudent therefore to seek non-UK stock, like Liontrust Asia Income and JP Morgan Emerging Markets Income.
For those with an eye for their dependents, investing in the junior stock market, AIM, brings the benefit that after two years, holdings – such as Asos and Hotel Chocolat – are free from inheritance tax.
For the ethically minded, there are many funds to choose, notably Aberdeen Ethical World Equity and Vanguard SRI Global Stock. Yet such an approach will not ensure best returns.
The top performing company in the FTSE100 over 30 years has been British American Tobacco, turning £10,000 into £748,600. For UK funds over the same period, Scottish Widows Ethical achieved a paltry £41,700 but Halifax UK Growth £470,700.
Global growth is forecast at 3.9 per cent for both this year and next according to the IMF, which believes the UK will achieve 1.6 and 1.5 per cent respectively, despite low unemployment.
In the US, growth could achieve 2.9 per cent, partly from Trump’s success in gaining concessions from China.
A balanced portfolio needs to take a global view, recognise the power of technology and the continuing success of emerging nations like India.
It should be able to reap rewards whilst having the flexibility to move from stormy weather to calm conditions.