Why a well-diversified portfolio is important
Every investor – whether they’re a SIPP millionaire or not – should aim to have a well-diversified portfolio. This is because asset classes act differently in the same economic conditions. Having a mix of asset classes, around the world, in different sectors can potentially help your portfolio have a smoother ride over time. The ‘manage risk’ section of our principles for good investing talks more about this. You can read up on our five investing principles here.
Here are Bhavi’s thoughts about diversification.
“Up until the pandemic, we’ve experienced ‘favourable markets’ with an abundance of central bank liquidity, moderate inflation and, therefore, low interest rates. Since the start of last year these three critical variables have been turned on their head, making it more important than ever to diversify across different markets, sectors and asset classes. For example, investors who were heavily concentrated in tech and the US, saw their portfolios take bigger hits when the S&P and Nasdaq dropped throughout 2022 (during a period which saw rising interest rates, where the value of these stocks is greater in a low interest rate environment), than those who built balanced portfolios across different markets, sectors and asset allocations.”
“When I consider the risk and diversification of a SIPP, I take in the wider wealth of my clients – which includes everything from cash savings to other investments such as property, art and collectibles. I also consider what investments they hold with different providers – if they have more SIPPs and ISAs elsewhere – as there may be overlaps. I often find that clients aren’t as well-diversified as they think, as they might have different funds, but the underlying companies may be similar.”
Is your portfolio fit for purpose? Ask yourself these questions
By now, you might be wondering whether your own portfolio is as diversified as it can be. These are the type of questions that Bhavi runs through with her clients when discussing their portfolio. It should help you reassess your portfolio and to understand how well balanced your own portfolio is. Or not, as the case may be.
- What’s your investment objective for this portfolio? Growth or income?
- What are your goals? What is this money to be used for (property purchase, a child’s wedding, retirement plans)
- What’s the time horizon? When do you think you’ll be drawing on this?
- What other savings and investments do you have outside of this portfolio? Do you have portfolios of different risk elsewhere?
- What’s your risk tolerance on a scale of 1-5? To help you put this in context, I’d generally say that at the lower end ‘1’ aims to marginally beat inflation (of course with the sustained periods of high inflation rates that we’ve seen this has been a tall order). Whereas ‘5’ is at the top end, where you are comfortable that you understand that markets ride in cycles and you’re happy to ride out 30-40% drops.
- How do you feel when there are big drops in the market?
- How confident are you when it comes to investing, and how did you put current portfolio together?
Constructing and managing a portfolio isn’t for everyone. If this checklist has raised even more questions than it’s answered, you might like to think if financial advice is right for you to get a personal recommendation. You can read more about financial advice here.
Our SIPP millionaires’ top 10 funds
If you’re interested in how to invest like a millionaire, here are the top funds that were most popular with our SIPP millionaires as of 6 October 2023. Of course, these customers could well hold shares as well as other accounts and investments elsewhere, so it’s impossible to draw definitive conclusions. But it gives you a glimpse into what a millionaire’s mindset looks like.
A general observation is that investors have leaned toward lost-cost index tracking funds (ranks 1, 3, 4, and 10) for the core of their portfolios. And it’s perhaps expected that on a Fidelity platform, many long-standing customers will have opted for Fidelity index funds, and actively managed funds. It is also worth highlighting Fundsmith Equity as an example of a fund with a ‘quality’ bias, as mentioned by the second SIPP millionaire above.
And the inclusion of a cash fund is probably a symptom of the times. Such money market funds invest in a portfolio of short-term cash deposits, money market instruments and high-quality bonds. It is designed to provide a return that beats or is close to short-term cash deposit rates in a bank or building society. The appeal of these funds has surged this year as interest rates have risen. The Fidelity Cash Fund here currently yields an income of 5.23%.1 Please note this is not guaranteed.
As with any investment decision you make, please do your own research to make sure it aligns with your own goals and circumstances.
Looking for more support?
You don’t have to be a millionaire to take financial advice, but we do recommend that it’s best suited to anyone with over £100k to invest (which can include your pension) as there are other ways of investing more cost-effectively if you have less than that. We offer one-off or ongoing advice depending on your needs. You can find out more about financial advice here. You can also request a call back from a financial adviser.
If on the other hand you have over £250k to invest (including your pension) you’re automatically assigned a Wealth relationship manager – like Bhavi – or a financial adviser depending on your needs. As a Wealth Management member, you get access to an exclusive range of benefits. You can read more about Wealth Management here.
And if you’ve got a number of pensions dotted about and are struggling to keep tabs on them all, you might like to think about moving them to one provider. It’s arguably easier to manage your investments if they’re all in one place and you can read about the pros and cons of transferring your investments here.
Got a burning question you want to ask? Why not drop us a line. Click here to ask an expert your question.
Source:
1 Fidelity Cash Fund Provider Factsheet, 30 September 2023
