What’s in your basket?

Diversifying your assets helps spread risk by lessening the potential for losses

Most investors are used to hearing the term ‘diversification’ – but it has a broader meaning than many realise. Diversification is the process of investing in areas that have little or no relation to each other. This is called a ‘low correlation’.

Spreading investment risk 
You can also invest in assets that have a negative correlation. This means that the assets will move in opposite directions to each other. Diversifying your assets helps spread risk because you’re lessening the potential for losses. If you had all of your money invested in one asset, sector or region and it began to drop in value, your investments would suffer.

By investing in assets that aren’t related to each other, while one part of your investment portfolio is falling in value, the others aren’t going the same way. Some assets may actually go up in value when others could decrease. It is also possible to diversify through investing in different markets, countries, companies and asset types.

Adverse market conditions 
Diversification is an essential part of building your investment portfolio. It can give you peace of mind that your investments will sustain in adverse market conditions and cushion losses. But it will not lessen all types of risk.

Diversification helps lessen what’s known as ‘unsystematic risk’, such as drops in the value of certain investment sectors, regions or asset types in general. But there are some events and risks that diversification cannot help with. These ‘systemic risks’ include interest rates, inflation, wars and recession. This is important to remember when building your portfolio.

Diversify by assets
Having a mix of different asset types will spread risk because their movements are either unrelated or inversely related to each other. It’s the old adage of not putting all your eggs in one basket.

Probably the best example of this is shares, or equities, and bonds. Equities are riskier than bonds and can provide growth in your portfolio, but, traditionally, when the value of shares begins to fall, bonds begin to rise, and vice versa.

Therefore, if you split your portfolio between equities and bonds, you’re spreading the risk, because when one drops, the other will rise to cushion your losses. Other asset types, such as property and commodities, move independently of each other, and investment in these areas can spread further.

Diversify by sector
Say you held shares in a UK bank in 2006. This investment may have been very rewarding, so you decide to buy more shares in other banks. When the credit crunch hit the following year sparking the banking crisis, the value of your shares in this sector (financials) would have tumbled.

So once you’ve decided on the assets you want in your portfolio, you can diversify further by investing in different sectors, preferably those that aren’t related to each other.

If the healthcare sector takes a downturn, this will not necessarily have an impact on the precious metals sector. This helps to make sure your portfolio is protected from dips in certain industries.

Diversify by geography
Investing in different regions and countries can reduce the impact of stock market movements. This means you’re not affected by the economic conditions of just one country and one government’s fiscal policies.
Many markets are not correlated with each other – if the Asian Pacific stock markets perform poorly, it doesn’t necessarily mean that the UK’s market will be negatively affected. By investing in different regions and areas, you’re spreading the risk that comes from the markets.

However, you need to be aware that diversifying in different geographical regions can add extra risk to your investment.

Developed markets like the UK and US are not as volatile as some of those in the Far East, Middle East or Africa. Investing abroad can help you diversify, but you need to be comfortable with the levels of risk that come with them.

Diversify by company
Spread your investments across a range of different companies. The same can be said for bonds and property. One of the best ways to do this is via a collective investment scheme. This type of scheme will invest in a basket of different shares, bonds, properties or currencies to spread risk around. In the case of equities, this might be 40 to 60 shares in one country, stock market or sector.

With a bond fund, you might be invested in 200 different bonds. This will be much more cost-effective than recreating it on your own and will help diversify your portfolio.

Beware of over-diversification
Holding too many assets might be more detrimental to your portfolio than good. If you over-diversify, you might not end up losing much money, but you may be holding back your capacity for growth as the proportions of your money in different investments will be too small to see much in the way of positive results.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM MAY GO DOWN. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED.

Pension decluttering

Have you considered tidying up your arrangements?

It would appear we are now increasingly becoming a ‘consolidation nation’, with many people combining their different contracts and services to make them easier to manage. It’s a growing trend, and new innovations are coming into the market all the time to tempt consumers. The recent launch of ‘quad-play packages’, which now combines mobile, home phone, broadband and TV, are a good example.

Making it easier 
Research from YouGov has found that over half of us are now doing this, with reasons ranging from making it easier to keep track of costs, to keeping on top of admin. Easily the most popular thing to combine was energy, with a third of us choosing to combine gas and electricity, followed by home and contents insurance.

ust behind that comes TV, phone and broadband. But the consolidation trend hasn’t taken off in all areas. The research showed just 9% have combined their car insurances and only 3% have combined their mobile contracts to make use of mobile phone family tariffs.

Providing a clearer view 
Interestingly, just 3% of those surveyed have consolidated their pension. However, this trend might change because of the reforms in the Budget announced earlier this year, giving people even more reason to consider tidying up their pension arrangements. Many of us have more than one pension, and almost two thirds of us with pensions don’t know their total value. Some pension decluttering could also make our finances simpler to manage and provide a clearer view too.

If you’re thinking about a spot of pension decluttering, it’s always good to have a plan in place first.

Here are 5 tips that could help with your pension planning:

1. Create a list of all your pension plans and check you receive an annual pension statement –Billions of pounds worth of pension funds is going untraced as a result of people losing contact with their pension. The Government provides a free pension tracing service which allows you to find lost pensions using your national insurance number.

2. Make contact with each provider to check the value of your pension and find out what it is likely to provide at retirement – This will help you assess whether your plans are on track.

3. Understand your benefits – If you’re considering consolidating your pensions, check you’re not giving up valuable benefits such as guarantees or enhanced tax-free cash. It’s important to speak to an expert to get information on your own situation, as you may want to keep these.

4. Check how your money is invested – Make sure your money is invested in funds that reflect your attitude to risk. Keep this under review, particularly as you get closer to the time you plan to retire.

5. Get online – See if you can view your pension savings online – that way you can keep track and see how your pension is doing more easily, so you feel more in control.

Source:
All figures unless otherwise stated were from research for Standard Life conducted by YouGov Plc among 2,059 GB adults. Fieldwork was undertaken between 17–19 December 2013. The survey was carried out online. The figures have been weighted and are representative of all GB adults (aged 18+).

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

The nation’s favourite overseas retirement destinations

Over 6 million UK adults plan to move abroad in later life

An even split
In total, over 6 million UK adults are planning to retire abroad, with an even split between Europe and the rest of the world. Of the estimated 3.2 million UK adults planning to retire in Europe, Spain is the most popular destination with 26% of the vote. France follows in second place with 17% of votes. Italy comes in third place with a 10% popularity rating.

Looking further afield, an estimated 3.2 million UK adults are planning to retire outside Europe. The most popular destination is America, with 16% of votes. Australia follows in second place with 14% of votes. Coming in third place is the Far East, which pulled in 13% of votes.

The right planning
As is evident, a huge number of people harbour a desire to retire abroad. Thoughts of better weather, cheaper living costs and potentially cheaper property than the UK can be a strong draw. But, thinking that your regular holiday destination can also be your ideal retirement home might be hit with flaws. Without the right planning, savings and advice, you can quickly get caught out by local tax laws, exchange rates and other financial arrangements, turning a retirement dream into a potential nightmare.

You might also get a nasty shock later in retirement when you find your UK State Pension does not increase annually because the country you choose to retire to does not have a reciprocal agreement in place with the UK. As an example, if you retired to Canada ten years ago, your UK State Pension would now be worth 42% less than if you had retired across the border in the US. Or, put another way, your pension would be worth £1,742 more a year by simply choosing the US as a retirement destination rather than Canada.

The nation’s favourite overseas retirement destinations are:

1st: Spain
2nd: France
3rd: USA
4th: Australia
5th: Far East
6th: Canada
7th: Italy
8th: South East Europe
9th: India
10th: Portugal

Source:
MGM Advantage research among 2,028 UK adults aged 18+, conducted online by Research Plus Ltd, fieldwork 17–22 October 2013.

The UK full basic State Pension for a single person was worth £79.60 in 2004. From April 2014, it is now worth £113.10 a week, an increase of 42%. If the country you’re retiring to has a reciprocal agreement in place with the UK, then the UK State Pension will be paid and increase as normal. However, where there is no agreement, and that includes Australia and Canada, your State Pension will be frozen and won’t increase.