From an investment perspective, we are living through strange and jittery times that may ultimately lead to greater diversification.
Let’s start with the strange. Around a quarter of bonds sold around the world are now said to be paying negative returns when the rate of interest is mapped on to the premium paid to buy the bond in the first instance. In other words, if you happen to hold onto one of these bonds until maturity, you will lose money. And yet ironically one root cause of this phenomenon is demand for bonds.
And the jittery. Well, witness UK equity investors who withdrew around £1.3 billion from funds in July of this year. The biggest impact of the sell-off was on UK-focused funds.
There are a variety of reasons for the downbeat mood of Britain’s equity investors, but Brexit certainly looms large in their thinking as does the likelihood of a global downturn. Meanwhile, the UK property market – another important destination for investors’ cash – remains mixed. Holding up in some areas, weaker in others, but certainly not booming.
Now, these – along with cash – just happen to be the asset classes that have traditionally been favoured by investors. And while the concerns that currently surround them are due to some very specific (and possibly also temporary) causes, the question marks that hang over today’s markets do beg a question – namely, is it time for investors to consider diversification?
Reasons to Diversify
There are at least three very good reasons why it can often make sense to diversify.
Firstly, diversification provides a means of reducing exposure to volatility in a traditional asset class. Secondly, there may be better returns to found elsewhere. Thirdly, but equally importantly, a willingness to look at a broader range of investment options provides a comprehensive means to tailor a portfolio to the life goals and risk/return preferences of the individual: the more limited your choice of asset class, the narrower your investment strategy is likely to be.
So what are the diversification options?
Well, alternative finance is certainly playing its part in opening up the investment market. Lending to businesses and individuals via a platform will certainly provide a means to secure a much better rate of return than simply putting cash into a high-interest rate savings account and depending on market conditions, Peer-to-Peer and Private Debt platforms can outperform some equity and bond funds.
There is also increasing interest in investing – either directly as a shareholder or through a fund – in small, fast-growth companies. There are high returns to be made here, but there are clearly considerable risks associated with putting capital into businesses that are defined by their potential to grow rapidly rather than their actual current performance. However, those risks can be mitigated to a large degree by investment in businesses that qualify for investment under the Enterprise Investment Scheme (EIS), Seed Enterprise Investment Scheme (SEIS), or through a Venture Capital Trust (VCT). In all of the above, investors enjoy generous tax breaks amounting to 30% on the sums invested. There are some restrictions however. For instance, EIS and VCT investments must be held for three and five years respectively, so these are medium-term prospects.
The Route – City wealth club has a range of investment opportunities that enable Members to diversify in line with their own financial objectives and life goals. In addition to EIS, SEIS and VCT opportunities, the Route operates its own Private Debt Platform, providing loans to entrepreneurs, particularly in the property sector. Two financial reviews a year, enable members to select those opportunities that are most aligned to their goals.
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