What does diversification mean?
Tuesday 15th October 2024
Katy Baxter
Having a well diversified portfolio of investments is a phrase often heard when talking about the need to reduce the risk of directly holding stocks and shares. This is a sentiment we absolutely agree with. History shows us that picking ‘winners' year after year is almost impossible – if it was possible we would all be multi-millionaires many times over!
Today many advisory firms create portfolios for clients using a range of different funds and asset classes, from fixed income, cash, stocks, property and alternative assets, in an attempt to reduce risk and generate good returns for clients. These funds need regular rebalancing to keep the asset allocation and exposure to risk consistent, and this requires the regular sale and purchase of funds which can result in Capital Gains Tax (CGT) liabilities and increased transaction costs. We feel that this can be detrimental for our clients and so at Montgomery Estate Planning we primarily recommend multi-asset funds for our client investments. Let the experts make the buying and selling decisions - the fund manager and their team make these decisions inside the fund, creating no CGT liabilities for our clients.
Clients are sometimes concerned that when we only recommend 2 or 3 funds for them to invest in and they wonder if they have enough diversification. We want to give you an example of the scale of diversification given by only one fund. Included in our carefully curated Core Fund panel is Vanguard Life Strategy 60% Equity Fund, which is classed as a passive fund and therefore has much lower costs. As you can see from the rolling 12 month performance table above it has performed consistently well.
This fund is created with approximately 60% shares and 40% bonds. All of this is achieved with an ongoing annual charge of 0.22% to Vanguard. However, the most interesting fact is that the portfolio is made up of 17 Vanguard funds where there is exposure to 30,751 holdings. We regard this as a huge level of diversification within just one fund and as you can see from past performance it has served clients well. Diversification doesn’t have to mean a large portfolio of individual funds requiring regular rebalancing. One or two very carefully selected multi-asset funds can very often achieve a far higher level of diversification with better client outcomes.
PS Please remember that past performance does not guarantee future returns and returns can go down as well as up. This does not constitute financial advice as every client circumstance is different, please let us know if you would like to discuss.