Bruce Pearce 14 June 2019
Holding too many or too few funds is an issue our advisers see time and again. There’s no magic number for how many holdings you should have but it’s unlikely a portfolio with more than 20 funds is the best option. On the other hand it’s difficult to build a truly diverse portfolio without holding at least 10 funds.
Looking at our clients’ portfolios before taking advice shows how common under and over diversification is. Over 40% of the portfolios had fewer than five stocks, while over 100 clients had 50 or more investments.
Here’s what some of our advisers have to say about the diversification issues they see and some helpful tips. Plus, we share an example of how one client put rebalancing advice into effect.
This article isn’t personal advice. All investments rise and fall in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, please seek advice. Past performance is not a guide to the future.
Look at the whole portfolio
I sometimes see clients who are focussed on a particular part of their portfolio but as a consequence, neglect other parts. For example, a client may focus on diversifying an ISA but neglect their SIPP. I always encourage my clients to take a holistic view of their investments but this is especially important when it comes to retirement finances. Even if you’ve got a lot in one place, it still pays to keep your eye on the ball across the board.
10 minute tip: Take a look at the part of your portfolio you often ignore – for many people it’s their pension.
You need a strategy
The trap many clients fall into is investing without a diversification strategy. That’s to say, having a balanced portfolio is much easier if you start by planning out how much of your money you want to invest where. Whether I’m helping a client who’s over or under diversified, I’ll help them invest strategically rather than going for a scatter gun, more-the-merrier approach.
10 minute tip: Without looking at your portfolio, write what you’d like to invest in. For example, is it important to you to have a spread across the globe? Are you happy with higher risk shares or would you prefer to include bonds? Starting with a blank piece of paper is often easier than thinking about how to tweak the investments you’ve already bought. Once you have an idea of how your portfolio should look you can work towards it.
There is such a thing as faux-diversification. This can happen in a few ways. For example, a client may hold shares, funds and multi-managers thinking they’re diversified when in fact there’s quite a lot of cross over between those holdings. This means they may not be negating as much risk as they think. The other common example is having multiple tracker funds on the same index. Again, having more than one tracker may feel like you’re diversifying but you need to look under the bonnet to see if that’s really true.
10 minute tip: Scratch the surface by looking at the underlying holdings with our portfolio analysis tool. You may discover overlaps between funds, and gaps you weren’t aware of.
Real client case study: Mr Cross from Derby, advised by Thomas Campbell
Mr Cross got in touch with HL after becoming unhappy with both the performance of the investments in his ISA and the level of advice he was receiving from his former adviser.
When Thomas Campbell picked up the case at HL, his first job was to understand what Mr Cross wanted to achieve by taking advice. By switching to an HL adviser and by changing his investments, Mr Cross saved himself the cost of ongoing advice (which he wasn’t happy with anyway) and ended up with lower fund fees.
Next Thomas turned his attention to one of Mr Cross’ SIPPs which he already held with HL via a corporate scheme. Mr Cross made regular contributions to this SIPP but was only ever invested in one fund.
The solution was to reinvest the value of Mr Cross’ SIPP into a growth portfolio developed by HL’s team of investment experts. This growth portfolio consisted of 10 funds suited to Mr Cross’ attitude to risk and his life stage.
Since taking advice, Mr Cross has also decided to transfer another of his SIPPs to HL.
How’s your diversification strategy?
If you’re a confident investor, you may think diversification is easy. The reality is, it’s hard to do it well.
Regardless of whether you’ve got 5 holdings or 50, like a good recipe, it’s the blend of ingredients not the quantity which makes the difference between a Saturday night take away and a Michelin star meal.
Our advisers put the hard work in, getting to know your financial goals so they can analyse your holdings to make sure you’re diversified in the right way.
Whether you need pointing in the right direction or a complete overhaul, we can help. We give our clients the option to take one-off advice. That way, you’re free to continue managing your own investments if you choose to without the cost of ongoing advice you don’t feel you need.
To find out more about our advice service, book a call with our helpdesk.