This content is for information and inspiration purposes only. It should not be taken as financial advice or investment advice. To receive tailored, regulated advice regarding your investments and financial goals, please consult an independent financial adviser here at Suttons IFA in Sale, Cheshire, or in your local area.
Most investors are familiar with the financial planning maxim that you shouldn’t put all of your investment eggs in one basket. The extreme example is of an inexperienced investor putting all of their money into the shares of a single company, which promptly lose value and later fail. By spreading your capital across many different companies and asset classes, the argument goes, you can mitigate your investment risk exposure. After all, if one company in your portfolio falls then the other, successful ones can keep your portfolio going, whilst fixed-income securities (e.g. government bonds) can provide an additional buffer against market volatility.
This concept makes a lot of sense, and it’s the approach our Manchester-based financial advisers take here at Suttons IFA. However, this isn’t the full story when it comes to building a successful, appropriately-diversified portfolio. There are a range of important areas to consider, which is best done in consultation with an experienced financial adviser. In this article, we will outline some of those areas for your consideration. If you’d like to discuss this subject in more detail with us regarding your own portfolio, please contact us to arrange a no-commitment financial consultation with our team here at Suttons IFA, at our expense:
T: 0161 969 1703
E: [email protected]
#1 Avoid over-diversification
Whilst it is unwise to focus all of your investments in one or two opportunities, it is also a mistake to spread yourself too thinly across an unmanageable number of investments. Over-diversification often occurs when nervous investors try to shield themselves from market volatility, but this can actually be counterproductive. This is where an independent financial adviser can add a lot of value, since it’s often hard to determine on your own when you have reached the point of over-diversification. They can help you avoid the point where your marginal loss of expected return exceeds the marginal benefit of reduced risk.
#2 Be careful with illiquid investments
2019 has been an important year for highlighting the danger of investing in funds and other assets with poor fundamentals. There was the Neil Woodford, whose UK Equity Fund declined dramatically from its £10bn peak two years ago to less than £3bn, suspension and then eventual closure. More recently, we’ve also seen he M&G Property Fund witness investors pull out £138m over fears of imminent collapse. Both cases have their own distinct stories, of course, yet both have undeniably suffered from poor liquidity. No matter what form your diversified investment strategy takes, be careful to examine the fundamentals of your assets with an experienced financial adviser.
#3 Invest across the world
You might think you have a diversified portfolio if your investments are spread across UK cash, funds and bonds. Yet what would happen to this capital if the UK experienced significant market volatility or an economic downturn? Having all of your money tied up in one country (no matter how attractive it looks) is quite a risky strategy. As a result, financial advisers are often right to recommend that you consider not just diversifying across different sectors and asset classes, but also across different jurisdictions. The precise form this might take will, of course, depend on important factors such as your investment goals and risk tolerance.
#4 Try not to focus on market cap
Some argue that large-cap companies provide better returns than small-cap, and others argue vice versa. The main point here is to not let yourself get too tangled up in this debate. What matters more is the strength of the businesses contained within a fund, regardless of their size.
#5 Beware of costs and fees
Regardless of how you and your financial adviser decide to diversify your portfolio, it’s important to never neglect the costs of your investments. Remember, the fees which you pay on funds and other assets are more within your control, compared to your investment returns in 12 months’ time (which are largely outside your control). As a general rule, actively-managed funds tend to be more expensive than tracker funds due to the regular, active trading that’s involved with the former. Not only does the fund need to cover the costs of employing an active manager, but their buying and selling of shares are often taxed as well. These costs are often handed down to the investor, which naturally then eats into their returns. Here at Suttons IFA, this is an important reason why we tend to prioritise lower-cost index funds for our clients’ portfolios, which tend to outperform active fund managers in the long-run anyway!
Building a strong investment portfolio is a challenging yet exciting endeavour. It requires ongoing attention and refinement, even after you have established the initial strategy and set your plan in motion. It’s important to acknowledge that there are many investment blind spots which people fall foul to, and it’s easy to be influenced by irrational emotions during moments of market volatility or decline.
This is why it can be enormously helpful to speak with a financial adviser, who can act as an impartial sounding board for your concerns and leverage their expertise to help keep your portfolio on track towards your goals.
If you would like to know more about financial planning or wish to discuss your own financial goals and strategy with us, then we’d be delighted to hear from you.
Please get in touch using the details below, to arrange a free, no-commitment financial consultation with a member of our team:
T: 0161 969 1703
E: [email protected]