CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when trading CFDs with this provider (Saxo Bank). You should consider whether you understand how CFDs, FX or any of our other products work and whether you can afford to take the high risk of losing your money.

I am writing this post as a relative newcomer to the industry so writing this is as useful for me as I hope it is to you. I have been working with CSS Investments for 18 months as an Account Executive and once I have completed the training programme I will be a fully qualified and regulated Advisory Stockbroker. As you can imagine, the past 18 months have been a steep learning curve and I am always trying to further my understanding of the stock markets, the various sectors within it and the stocks within those sectors. Then there are the rules and regulations, covering not only trading, but also dealing with clients and the all-important area of financial crime and anti-money laundering.

That is enough of me! Here is why I have decided to write about this particular subject….

I have been thinking about the comments made by Dean on our first ever blog post. The comment asked about the circulation of funds between different asset classes and sectors. It highlighted the issues around asset diversification and what comes into play when deciding which areas to invest into.

Of course there are no right or wrong answers to this. A person’s portfolio is as unique to them as their finger print and each decision is made on a case by case basis, depending on what the individual’s investment goals and objectives are, as well as their appetite for risk. A common theme between the majority of investors is the issue of diversification, whether it is between different asset classes, products or sectors or a combination of each.

It is widely suggested that the key to successful investing is to spread your money across different types of asset classes; the main asset classes being cash, shares, property, fixed income and alternative investments. The way that your portfolio is spread between these asset classes all depends on you. If your goal is mainly capital preservation, one way to achieve this might be to put the majority of your money in cash and fixed income securities, whereas if you want high risk and potentially high returns, you may be better suited to have a large amount of capital in shares and alternative investments. Of course taking on higher risk also means the potential for making a loss on your investment. That is why the UK regulator insists all financial services firms warn people of this fact.

Investment diversification suggests that you should not have all of your eggs in one basket. If as an investor, you are worried about being over weighted in a particular sector or asset class, have you ever thought about spreading out your investments or even investing into asset classes that aren’t perfectly correlated with each other?

Controlling your risk

When it comes to the stock market, deciding where to place your money can be tricky. You are now faced with looking into various sectors, as opposed to just a few asset classes. If you do not have hours to spend trawling the internet and newspapers for the latest ideas and trends, you could put all of your money into managed funds and watch your portfolio increase or fall in line with the market. Something that seems to be somewhat forgotten these days is the old fashioned art of stock picking. Finding a sector, breaking that sector down and choosing which company you feel will outperform the rest. Once you have done this for a number of different sectors you then have diversification. Sounds simple right?

Well it isn’t. How you go about this all depends on you. You may be a long term or short term investor, you may be looking for high or low risk investments, and you could prefer dividends over capital growth. You may not like oil companies or maybe you had a bad experience with your gas company so that you would never buy their shares. All of these factors are in place when deciding where to place your money and it is not always logical or rational. Then once it is placed, how will you go about monitoring and developing your portfolio over the years?

At CSS we give advice to a variety of investors. For us, the way that we help our clients is that we start with the foundations and the basics in order to understand exactly what their needs are. Our advice in then tailored towards the diversification needs of each investor. Not only are the decisions made on what sectors to invest into, but also what stocks to pick within the certain sectors and what weightings to have in each stock. Whether you take advice or not, these decisions are made easier by knowing what your investment goal is and how you are going to reach this goal. Of course your investment journey will not run smoothly and you may have to adapt from time to time. This is where having the knowledge of the markets and your needs will come into play.

For example, if a certain sector starts to underperform, do you know when to put your money elsewhere? If you are diversified well enough, then one underperforming sector shouldn’t have a catastrophic effect on your entire portfolio, should it?

Time to reflect?

To reflect on the original question of how decisions are made on the circulation of funds between certain sectors and asset classes, I feel that the answer is in the underlying theme of this post. That theme is you and your investment finger print; your investment goals and objectives as well as your appetite for taking investment risk.

You are the one that decides where your funds are placed, what asset classes you are using and what sectors you are invested into. The decision to move funds between sectors is down to the amount you have to invest, your risk appetite, and your investment goals and objectives. When it comes down to it, you may feel more confident talking to an investment professional to help assess the pros and cons of each investment decision or to address any doubts you may have, or simply to use as a sounding board for your own investment ideas. This is where I feel that CSS adds value to its clients and their investment portfolios.

If you struggle to understand which areas may benefit your portfolio the most, it might be worthwhile stepping back, thinking about why you started investing, what you are trying to achieve and how you are going to achieve it. In doing my research for this article I have found a number of ideas of what a “perfectly” balanced portfolio looks like. Something that I found interesting is the chart below from The Wealth Management Association.

Conservative Index Income Index Growth Index Balanced Index Underlying Asset Index
UK Equities 19.0 35.0 40.0 37.5 UK All-Share Index
International Equities 11.0 17.5 37.5 30.0 UK All World Ex-UK Index
(calculated in Sterling)
Bonds 45.0 32.5 7.5 17.5 UK Gilts All Stocks index
Cash 5.0 5.0 2.5 5.0 7-Day LIBOR –1% (London Interbank Offer Rate)
Commercial Property 5.0 5.0 5.0 5.0 All UK Property Index
Hedge funds/ Alternatives 15.0 5.0 7.5 5.0  UK/WMA Hedge (Investment trust) index
Total 100 100 100 100

Source: The Wealth Management Association.

I would be interested to hear about your techniques of diversification and how you decide where to place your money. Please leave a comment below to share your experiences of how you decide on how to diversify your investment portfolio.
As you can see, this table indicates one way of how your money could be invested depending on your investment goals and objectives. How closely does your portfolio reflect the above? Something to help you reflect could be our portfolio review (view Craig’s post). We are more than happy to offer you an avenue for reflection as a way of getting you back on track towards your ultimate goal.

 

 

 

Comments

  1. John Symons says:

    Very interesting. Please note that the headings in the table should be shifted one column to the right.

    • George Stainton says:

      Hi John, thank you for the heads up – this problem has been fixed now and we apologise for the technical difficulty.

      I am glad you found this article interesting, we love hearing what our readers think and what their take on things are, let me know if you have any questions!

  2. Alan says:

    I thought the article was very good,but maybe you should have more than 5% commercial property and gold as well.

    • George Stainton says:

      Hi Alan,
      Thank you for your comment. I too was surprised by the WMA’s relatively small exposure in property, considering it usually takes up a large portion of one’s wealth. What do you think would be the right weightings for your objectives?

  3. BrianF says:

    Following Alan’s comment and your reply, I would have thought further sub-division of Commercial Property would be useful. I looked to see the Index quoted and found a whole new range of initials to contend with. :> epra….
    Here a sub-division was given into the top five companies by market value and other categories, perhaps this could form part of your future studies?

    • George Stainton says:

      Hi Brian,

      Interesting reply, I will look into this for further research.

      Is this an area you are particularly familiar with?

      Thank you for your feedback!

      • BrianF says:

        Not Particularly familiar with but have noticed over many years how
        sectors fluctuate, especially regarding housebuilding. I think that area
        is very much at the mercy of government policies. Similarly, Shopping Malls
        are at the mercy of customer confidence. Companies like Land Securities
        take on massive developments which might cut across different elected
        governments but continue since this is better than abandoning a semi-built project.
        Briefly, large seems much more secure than housebuilders and Mall owners.

  4. frank foxwell says:

    Interesting blog. This has helped me to understand the term ,’diversification’. Thanks George!

  5. capkaustat.xyz says:

    In reality, it’s not just financial salespeople who don’t use diversification correctly, it’s almost everybody. So, shots at brokers aside, this is more about what will keep you safe. Owning a lot of assets isn’t it.

    • George Stainton says:

      This post is about managing your risk effectively and making sure the areas that you are invested in are suitable for your appetite. If you have an adventurous attitude to risk then ‘keeping you safe’ will not be your priority when investing. As an aspiring broker I cannot give you advice but if your priority is keeping safe, maybe you should consider whether the stock market is for you and look at other options such as cash and money market accounts.

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