There are a range of reasons why investors might branch out beyond cash, stocks and bonds for at least a small proportion of their wealth. Here we discuss some interesting potential additions to your portfolio and why they might further your financial plans.
Cash holdings and residences aside, for time immemorial the “classic” investment strategy has been to split your portfolio into 60% stocks and 40% bonds – the former generating greater potential for returns and the latter acting as ballast while also delivering a modest coupon.
Recently though, this approach has been increasingly called into question. One reason is that stocks and bonds did actually plunge together in the dark early days of the COVID crisis, thus negating the belief that the two asset classes are uncorrelated. Another is the generally poor yields on bonds, and the fact that inflation will make anything other than inflation-linked bonds look even more unattractive.
The 60-40 debate is still raging, although it should be said that research shows this strategy did continue to serve investors well through 2020. What is clear, however, is that investors are thinking ever more deeply about diversifying to better protect – and grow – their wealth. As a result, many people are feeling that they should be a little more adventurous with their asset allocation.
What is clear, however, is that investors are thinking ever more deeply about diversifying to better protect – and grow – their wealth
This might mean investors stick to traditional asset classes, but seek greater returns by looking at more esoteric or slightly riskier securities within them (like small-cap equities). Or, it might mean allocating a proportion of their portfolio to alternatives, which, though it might be relatively small, could significantly boost returns.
If branching out appeals, here are some ideas to discuss with your adviser:
Venture Capital Trusts
VCTs are a form of tax-incentivised investment which have been around for 25 years to help reward investors for backing UK SMEs, and so taking on a higher degree of risk.
You can invest up to £200,000 each tax year in VCTs and get 30% income tax relief up front, as long as you hold them for five years. You can then enjoy tax-free dividends and capital gains on top.
Enterprise Investment Scheme
Investors can also get 30% income tax relief on EIS investments up to £1m in each tax year (these vehicles have also been around for decades). When held for three years, EIS gains can be CGT free and you can defer payment of CGT charges on other assets by reinvesting into EIS. You can even offset EIS losses against previous years’ income tax charges.
VCTs and EIS investments can be powerfully tax-efficient in several ways, which is why they are very popular with the wealthy. They are also a powerful way to support early-stage businesses which might overwise struggle to raise funds.
One of an adviser’s key responsibilities is to leverage all the possible ways of maximising their clients’ wealth, and that will mean broadening investors’ horizons with new ideas as appropriate. You might be surprised by breadth of strategies and new investment ideas you’ll encounter by talking to an expert. We can arrange some initial conversations fast and free.
Small and micro-caps
Relatedly, many professional investors are highly positive on the potential of small and micro-caps, with 80%i believing they represent a good investment opportunity in the current market and a quarter advocating a significant shift towards them.
Micro-cap indices have been outperforming mid and large cap indices this year, and almost three-quarters of professional see that trend continuing.
As we recently explained, the case is building for a commodities supercycle that could see a number of metals, oil and their associated mining and supply stream stocks continue to boom for an extended period.
However, commodities are a highly esoteric area of investments, with each commodity having its own nuances to understand. Confidence has already pushed commodities towards multi-year highs. Oil may be back to pre-COVID levels now, but – as we all remember – went into negative territory for the first time last April.
The rocket-fuelled rise of Bitcoin has been one of the biggest investment stories of recent times and this is an undoubtedly exciting area.
Many predict a continuation of Bitcoin’s stellar rise; some say it will hit $400,000 by 2030 amid general highs for cryptocurrencies. Cryptocurrencies are being taken more seriously as mainstream assets and many blue-chip financial institutions have piled in as well as everyday investors. Research indicates 70% of investors over 55 are already invested in cryptocurrencies or plan to do so this yearii.
However, digital currencies are known for being volatile and have been on a rollercoaster ride recently. They also remain vulnerable to risks from regulation and security threats.
Many wealth managers will be able to arrange exposure for interested clients and could be particularly helpful in sourcing collective investments (which invest in a basket of cryptocurrencies) in order to better diversify risk. You definitely need to understand both sides of the coin before taking a significant position, however, and beware of crypto-based frauds, which have rocketed recently.
Investments with a higher risk-return profile, as alternative assets generally tend to be, may well have a place in your portfolio. But the appropriate size of that allocation will depend on your risk-profile, objectives and time-horizon, as well as the existing asset allocation of your wealth.
When to invest and how are also key questions to answer before diving in. You adviser should have several ideas for how you can express an investment view as cost-effectively as possible.
If you think you should explore broadening your investment horizons, why not take advantage of some no-obligation calls with some experts?
ii deVere Group