A diversified portfolio

colesy

Just had a quick play with the numbers in my S&S ISA to work out how I'm weighted at the moment and it looks like this:


UK equity 37.1%


US equity 15.5%


HK/China equity 5.6%


Euro equity 27.9%


World equity 4.5%


UK specialist 4.7%


AIM 4.7%


I'm relatively new at this and to some extent have been 'playing close to home'. Any obvious big holes in the above structure? Thanks in advance.

InvestInPoker

You could add some exposure to Japan, Emerging Markets other than China and the Pacific area ex Japan for starters. Also a small exposure to Frontier markets diversifies further.

Of course you could take a different route and see if you are over exposed to the financial industry in general, or tech stocks or whatever with the holdings in your current funds. If you find you are you could balance this out by specifically targeting some other areas for further investment.

bowlhead99

At a glance, you've got around 75% very close to home like you say - UK equity, UK specialist, UK Aim, Europe equity. From other posts you have a business too, right? That's further linked to the UK economy, even if it isn't directly tied to UK/ Euro market prices.

Nothing wrong with a bit of home bias, but when the UK is only a tenth of world equity markets (by marketcap) and the US's market is a huge multiple of that, it's pointing to a very conscious decision to avoid the US when your proportions are reversed like they seem to be? Perhaps 'world' is heavy US but your overall weighting to North America is something to consider upping, if it hasn't been consciously avoided on purpose.

Japan, Asiapac ex-Japan and more generalist emerging markets beyond China (latin america, india, russia, africa etc) seem to be the ones completely lacking a presence in your portfolio.

There are of course a few different ways you can slice and dice the data - by industry sector, geography, market cap , 'growth' vs 'value' etc. And something not mentioned is whether you have any non-equity funds, doesn't seem so unless there's something hidden in 'specialist'? To go all out equities is a bold call, particularly if your low US exposure was anything to do with a gut feel that some global markets are high.

You had mentioned on a previous thread that you're maxing all your pension allowance while only leaving £1-2k pm available for other investment. So it might be that what we are looking at here within your S&S is only the tip of an investing iceberg and completely dwarfed by allocations across other parts of your entire net worth. In other words perhaps US is deliberately low because it's massive elsewhere. Also some of your split might be driven by choice of wrapper (e.g. with VCTs / EIS investments you are going to be heavy UK microcap) and that might cause you to try to accommodate by only having a relatively light ISA allocation to smallcaps or AIM. The opposite from what you've done with constructing a portofolio using AIM shares.

Overall I'd say this is a pretty unbalanced portfolio and pretty risky/volatile from the sound of it. A higher income means you can perhaps afford to take some losses from specialist funs. but that argument only partially works, because your're typically investing bigger stakes so might be hit harder in a crash than someone withe a lower income and more cautious portfolio.

The counterpoint is of course that if this is only a small portfolio in relative terms, to your net worth, you don't need to necessarily get all or any of your allocations perfect. There is no one true perfect allocation, a one-size-fits-all. But if at present the ISA pot is only thousands rather than tens of thousands you can perhaps just select a couple of multiasset funds with broader splits than what you are listing here.

Certainly cutting UK, Europe in favour of other underinvested regions would be something I'd look at, but also the sector balance. Smallcap tends to have a bigger market beta than largecap (i.e. goes up more in the good times and down more in the bad), dividend payers can be more resilient than pure growth companies and so on... so there are a variety of things to look at when considering your exposures.

If you've only been doing a thousand or two for a few months then your 5% AIM and 5% specialist might only be a few hundred quid each and not worth worrying about too much, but if you were then going to add more emerging markets or more frontier markets etc as suggested by InvestInPoker above, you'd have quite a bit invested 'off piste' and so with the whole thing being 100% equities it points to a pretty volatile portfolio over all.

colesy

Thank you both for your comments. You have given me a lot to digest.

Bowlhead99 - you're quite right to say that the S&S ISA is a small part of my net worth at the moment but it is likely to form a larger portion as time goes on. I have business assets that I can draw on when I retire, the house will be paid off by then and the plan is to downsize, and as you mention I'm maxing out on my pension contributions so there's a few irons in the fire.

Because I can stay invested even after I retire from the business, a couple of days a week consulting will keep me going nicely, I made a conscious decision to go very heavy in equities as my time scale is 10 years plus. However, I do want to get the balance right so I'll have a look at topping up in the US and emerging markets and see where we go from there.

The AIM stuff is a pure punt on oil exploration but as I have an engineering background and some industry knowledge, maybe not that much of a punt.

chucknorris

colesy wrote: »

Just had a quick play with the numbers in my S&S ISA to work out how I'm weighted at the moment and it looks like this:


UK equity 37.1%


US equity 15.5%


HK/China equity 5.6%


Euro equity 27.9%


World equity 4.5%


UK specialist 4.7%


AIM 4.7%


I'm relatively new at this and to some extent have been 'playing close to home'. Any obvious big holes in the above structure? Thanks in advance.

Mine is:

Cash 3%
DB pension 9%
Equities 16%
Home 18%
Other property 54%

I'm working on building up my equity % and also diversifying within my equities, it was only UK ftse allshare and the ftse 100, so not diversified at all. In the last couple of weeks I have invested £80k in the ftse 250 and I'm currently looking to invest about £20-£25k in a VCT. A bit further down the line I will invest in a global, USA and an emerging market fund and also invest in a £150k extension/refurb to my home.

Thrugelmir

colesy wrote: »

Just had a quick play with the numbers in my S&S ISA to work out how I'm weighted at the moment and it looks like this:


UK equity 37.1%


US equity 15.5%


HK/China equity 5.6%


Euro equity 27.9%


World equity 4.5%


UK specialist 4.7%


AIM 4.7%


I'm relatively new at this and to some extent have been 'playing close to home'. Any obvious big holes in the above structure? Thanks in advance.

I'd more interested in the actual companies and the industrial sectors they lie in, rather than just geographical regions.

bowlhead99

chucknorris wrote: »

I'm working on building up my equity % and also diversifying within my equities, it was only UK ftse allshare and the ftse 100, so not diversified at all. In the last couple of weeks I have invested £80k in the ftse 250 and I'm currently looking to invest about £20-£25k in a VCT. A bit further down the line I will invest in a global, USA and an emerging market fund and also invest in a £150k extension/refurb to my home.

Not that it's any of my business but if you acknowledge that your previous portfolio was not diversified at all, because FTSE Allshare is 82% FTSE100 + 15% FTSE250 + 3% FTSE Smallcap, and your only other holding was FTSE100 which is already in the Allshare, why would you then go and drop another £80k into the FTSE250 which was also already in your Allshare?

Surely the thing to have done would be to sell out some of the 100 to buy the 250, making the 100 a bit less dominant overall in your UK allocation, and then spend the new £80k on something that wasn't already in your portfolio and wasn't in the UK. Like the various other international funds that you mentioned that are now going to have to wait for 'a bit further down the line'.

Doesn't seem to make sense when all your other assets are UK focussed (house, investment properties, GBP defined benefit pension etc) and you already acknowledged you had a diversification problem. By putting that £80k into a fund you already had, you've just changed your UK balance a bit but are fundamentally on the exact same track with all those funds incredibly correlated with each other.
http://www.ftse.com/Analytics/FactSheets/Home/DownloadSingleIssue?openfile=open&issueName=ASX

Different strokes for different folks, I guess...

chucknorris

bowlhead99 wrote: »

Surely the thing to have done would be to sell out some of the 100 to buy the 250

First of all don't forget that equities are only 16% of my portfolio, I do find it slightly amusing that some on here discuss diversified portfolios but then disclose that their portfolio is 100% equities! So I don't really acknowledge that my portfolio is not diversified, only that the minor equities part of my portfolio could be more diversified. But I do of course accept that my portfolio is property heavy (but I am a chartered surveyor, so I am staying within my area of expertise).


But to answer your question that's exactly what I did, I sold an existing ftse 100 tracker when it was highish, put the proceeds into cash, then invested in a ftse 250 tracker when the market dipped.

bowlhead99

Fair enough, always interesting to hear how people have got to where they've got!

brendon

Here's roughly what the correlation in your portfolio looks like. High Correlation is bad for diversification. As you can see, your portfolio consists of funds/asset classes which are fairly highly correlated with each other (hence the dark red colour).



See this diagram of various stock and bond funds (mostly Vanguard funds).



In terms of equity, it's a good idea to have more exposure to Japan and Asia Pacific. Emerging and frontier markets are also good for diversification, but a little more risky. Beyond equity, any type of bond -- high yield, investment-grade corporate or government -- is good for diversification.

darkvader

I believe, in general, when looking at long term investments, its best to have a 40% US/UK/Developed Europe and 60% Rest of World split. I tend to stick to this to have just enough 'risk' to get good returns while keeping my feet on the ground. Few options then with this 60/40 split

Based on your risk appetite you can play around with this 60% and invest across developing Europe, Asia, Australasia, Africa, South America. Put everything in Japan or move to it into Brazil etc

Working further from this 60/40 split, if you want to tone down the equity crazy exposure and break your fall when markets nose dive, reduce it to 50/30 and put 20% in Bonds, Cash, Debt etc

If you want exposure to racy funds or specific sectors like Pharma, Technology, Oil, Gold, Property etc, then use the same principle. Keep it to 50/30 and 20% into any of the above, although your risk profile goes to the other extreme

A mix of the above two is best achieved with 50/30/10/10, so you have a taste of everything in your portfolio

Finally, if your investment is for less than 10 years then I'd advocate flipping it and keeping 60% in the Developed Markets, 25% Emerging and 15% in Bonds, Property etc

Note that this is just my preference and it has served me well previously

All the best
DV