Guest Article from Ella Davies of Clarion Wealth Planning Ltd. Ella is a Chartered Financial Planner who specialises in true, holistic, lifelong financial planning.
When we think of diversification in this context, you would be forgiven in thinking it relates solely to investments.
But if we broaden the lens and consider diversification’s role within a robust financial plan, you’ll find there are many more eggs which can be added to the basket. Think of it as a range of different pieces within a jigsaw puzzle, all shapes and sizes, coming together to create the structure of a financial plan.
It can be achieved by adopting different investment strategies, different timescales (short, medium and long term), maximising different tax allowances and the use of different financial products. The blend of which will all ultimately depend on your specific goals and objectives, put simply what are you looking to achieve and where are you aiming to get to. This is the crux of the matter, and everyone’s objectives are different, meaning not one financial plan is the same, as they should be bespoke to the individual or family in question. Inherently, those jigsaw pieces I mentioned earlier will therefore look different for everyone.
These are different for everyone, and a robust financial plan should account for these individual nuances. I have listed a few examples below, but the list is endless. Naturally as human beings our personalities and values are very different, therefore we tend to have different goals in life. I find that some of our goals and objectives can be similar, however we place a different level of emphasis on each when prioritising them.
Diversification within a financial plan is very much led by these personal objectives, meaning the jigsaw pieces look different for everyone.
You may wish to adopt different investment strategies for different pots of money depending on the timescales involved. For instance, for a pension fund which won’t be accessed for decades or will be left untouched for future generations, it may be prudent to adopt a more adventurous risk profile in comparison to an investment fund which may need to be accessed in the relatively short term. In this circumstance it would perhaps be wise to consider a more cautious approach given you may not have the ability to ride out any market volatility before this particular pot of money is needed.
The decision around timescales, very much depends on an individual’s objectives at each stage of their lifetime.
There are various different options when it comes to where to actually invest your money, and this is most definitely one area where it would be unwise to have all your eggs in one basket.
In terms of mainstream investment styles, these can be actively managed funds, passive style investments such as Exchange Traded Funds (ETFs) which track particular indices, or a multi-asset approach which tends to adopt a blend of both active and passive strategies.
You can of course invest in more esoteric investments which tend to be directly held assets such as farmland, forestry, gold and other precious metals, property and other tangible assets. The benefits of which is that these are not correlated to standard investment funds and so provide an additional layer of diversification. However, it is important to note that there is little regulation around these directly held assets and as such the investment risks tend to be higher.
Nowadays, there are a lot of different options available to investors which can easily be accessed online without taking any form of advice. Whilst I am sure these may offer some potential; it is important to remember that you should only invest in anything high risk and unregulated that you can afford to lose.
There are also various options when it comes to venture capital. Whilst these are inherently higher risk due to the less established counterparts involved, venture capital can be accessed via HMRC approved structures such as Enterprise Investment Schemes (EIS), Venture Capital Trusts (VCT), and AIM listed portfolios which offer valuable tax reliefs when used in the right context.
This leads me nicely on to my next point regarding tax allowances.
There are various methods and strategies in which you can invest tax efficiently. Making use of annual tax allowances through financial products such as Individual Savings Accounts (ISAs), pensions, Junior ISAs, Junior Pensions, General Investment Accounts and Investment Bonds to name a few. These products will allow you to make use of ISA allowances, capital gains tax allowances, tax deferred bond income, charitable donations and gifting allowances.
The allowances may seem small to some, however used correctly can make a huge difference over the longer term. I once had a client refer to these smaller allowances as ‘buttons’, however once I modelled the difference a disciplined approach of maximising these smaller allowances can make, he soon became an avid supporter of ISAs and pensions for his family.
In summary, there is a lot to consider when building a diversified portfolio and it doesn’t necessarily solely come down to your investment choices. A blend of the above strategies and how they all come together is important when visualising that completed jigsaw puzzle.
It is always best to take financial planning advice to ensure your objectives are met.
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
