All investors have their own perceptions of risk and return, investment objectives and timescale for access to their money; many also have their own areas of particular investment interest. There is never a 'one size fits all' approach to investment. Nonetheless, here are the five investments we think have a place in every investor's portfolio.
1. National Savings & Investments Index-linked Savings Certificates
Rising inflation will erode the value of portfolios over time. Inflation is not a problem for the UK at present, but many commentators expect it to rise in many countries in the coming months, as a result of the quantitative easing programmes implemented by governments worldwide.
Index-linked investments, which rise in line with a specific inflation index, are one way of protecting your portfolio. Financial advisers make several suggestions in this respect. "National Savings & Investments index-linked savings certificates are risk-free, tax-free and provide a guaranteed real return over inflation, and they can be cashed in at any time (although you'll lose some interest if you do so in the first year)," comments Jason Butler of Bloomsbury Financial Planning.
Andrew Swallow of Swallow Financial Planning in London is also committed to them as a core holding. "We have NS&I index-linked certificates in pretty much all our portfolios - where else can 50 per cent taxpayers earn inflation plus 1 per cent, regardless of what happens in the wider world?"
Mike Horseman, managing director of IFA Cockburn Lucas in Nottingham, prefers to use an index-linked global securities fund such as the Standard Life Global Index Linked Bond fund. This invests in a range of government and investment grade bonds worldwide, with payments linked to inflation levels in the country of issue. It is not risk-free, but it offers the potential for greater index-linked returns than the NS&I product.
More details: www.nsandi.com
2. Flexible mortgage
Minimising expensive debt makes eminent sense in the context of your wider portfolio as well. Robin Keyte, director of IFA Towers of Taunton, stresses it is foolish to pay higher levels of interest on your debt than you're earning from other investments. He suggests that you should "overpay any loan or debt which is charging interest at a higher rate than the net return you could expect to achieve on your investments after tax and charges, given your risk profile".
In this context, says Mr Butler, you could make use of a flexible mortgage. "Mortgage borrowing is the cheapest form of borrowing, and the beauty of a flexible account is that one can save or 'park' funds against the loan to reduce the interest incurred, until the funds are needed again," he says. So you can draw down funds against your mortgage to clear relatively expensive external debt.
Then, by building up funds against your mortgage, you're effectively gaining a risk-free, tax-free return equal to the mortgage interest rate you're not paying. "If mortgage rates are 4 per cent, a basic rate taxpayer would need to earn 5 per cent and a higher rate taxpayer 6.66 per cent on a risk-free investment in order to be better off not reducing the mortgage," explains Mr Butler.
3. Internet deposit account
Another key requirement is a cash element, which might well be your short-term cushion and emergency fund. "We'd recommend an internet deposit account, as they usually pay more than branch or postal-based accounts and are easy to operate online in conjunction with your bank account [so you can move cash as required]," says Mr Butler.
For details of best mortgages and online accounts visit www.moneyfacts.co.uk
4. Fidelity Moneybuilder UK Index Tracker
Equities, both UK and global, will also probably be in most portfolios because they tend to outperform most other asset classes over the long term; the question is how best to access them. Mr Keyte and Mr Butler both suggest the Fidelity Moneybuilder UK Index Tracker, which follows the All-Share and has no initial charge and a total expense ratio of just 0.27 per cent (compared with around 1.5 per cent for most actively-managed funds). "It is the easiest and cheapest way to invest in UK shares, and as a tracker it will probably outperform most actively managed funds in a rising market," Mr Keyte comments.
But the passive versus active investment debate is a contentious issue, likely to run and run. If you believe that a good active stock picking manager can outperform the index over the long term, you're likely to want at least to add some actively-managed funds to that index-tracking core.
For Mike Horseman, whose firm is strongly inclined to a global perspective, "global equities are a must". He likes managed funds such as Axa Distribution or CF Ruffer Total Return, which combine index-linked bonds with global equities, and suggests Hexam or Aberdeen for high-quality emerging market equity exposure.
Geoff Penrice of IFA Honister Partners points out that there are certain funds that crop up time and again in most portfolios, because they are run by reliably excellent managers and produce consistent performance. "Neil Woodford's Invesco Perpetual Income fund, the M&G Corporate Bond fund and maybe M&G Recovery are all good examples," he says.
He suggests that one possibility, if you want active management and instant diversification, is to look at funds of funds such as the Jupiter Merlin family, both Growth and Income. "Again, they're run by very good managers - John Chatfeild-Roberts at Jupiter has bags of experience - and the funds they hold are monitored and analysed to an extent that I as an adviser or a private investor would never have time to do. Also they can use different strategies, taking short positions as well as long, for example."
Contact: www.fidelity.co.uk
5. Gold Exchange Traded Fund
According to Mr Horseman, gold should be part of every investor's portfolio because it offers protection against inflationary trends and the falling real value of currencies. In the past, holding gold would have entailed buying small bars or coins - with all the attendant issues of insurance and storage - but these days, investors have a choice of attractive gold investment vehicles.
Mr Horseman's favourite is ETF Securities' Physical Gold ETF, which accounts for 6.6 per cent of the Jupiter Merlin Income portfolio he uses (even though gold itself does not generate any income). But he's also committed to a wide spread of alternative assets, including commodities, currencies, hedge funds, structured products and timber, for greater diversification - ideally, pre-packaged in a convenient fund form.
More details: www.etfsecurities.com
