- Mid-to-long term investment time horizon
- Building towards retirement
- Retired investors with a moderate to high value portfolio
Whether you’re getting started investing or you’re an old hand at playing the stock market, you can improve your returns – and take less risk – by choosing the right mix of investments.
To help you along, we’ve created three model asset allocations to suit investors that fall into each of the three main broad risk categories: Cautious, Medium and High risk.
If you don’t need to take out a significant portion of your money for at least five years, or you just have the capacity and the appetite to take more short-term risk, a Medium Risk portfolio could be the right strategy.
What’s in it?
Equities – 50%
Our Medium Risk asset allocation has 50 per cent in shares; enough to give decent exposure to this powerful source of wealth creation but wary of the impact a stock market sell-off can have in the short term.
Fixed income – 30%
Our Medium Risk portfolio has 30 per cent in fixed income. This benchmark is based on how UK government bonds with various maturities have performed over time. To improve performance, in a managed portfolio based on this asset allocation, investors would also use other government bonds and corporate bonds.
Government bonds are a haven when stock markets sell off; in the past the increase in the price of the safest government bonds have offset losses for the stock market. Corporate bonds can also behave differently to shares, which also balances equity risk in the portfolio.
Other – 15%
We allocate 15 per cent to the ‘other’ category. Alternative investments are varied and often volatile, but they can produce periods of strong performance. Furthermore, they often behave differently to ordinary shares and bonds, so help to diversify risk.
Cash – 5%
For the purpose of this long-term strategic asset allocation, we have not got a high allocation to cash. For some of our lifestyle asset allocations that are based on a medium risk strategy, we will have a higher allocation to cash, reflecting the fact there are personal situations that mean it isn’t always sensible to be as fully invested as in this strategic asset allocation model.
How risky is the Medium Risk portfolio?
Unless you need to sell your portfolio right away then a fall in its value doesn’t equate to a realised loss (when you sell at below the value you invested at).
That’s worth keeping in mind because it’s unavoidable that portfolios will see their value fluctuate. It’s also important to accept that to get a higher return over the longer term involves taking more risks when you invest.
Our Medium Risk portfolio has been designed to try to keep peak-to-trough falls in its value to below 25 per cent, which can happen in a succession of bad months.
Our back-tested asset allocation (to 1976) had a worst peak-to-trough of 25.6 per cent, compared with a worst fall of 45 per cent for a mix of UK and world shares.
For investors with a timeframe below five years, the Cautious portfolio strategy may be more appropriate, but if you are investing for longer or have the capacity to take more risk in the short term the Medium Risk strategy has potential to be more rewarding.
Take your allowances
It’s important to use your allowances. Take maximum advantage of work pension schemes and as much of your annual Isa allowance (£20,000 in the 2020-21 tax year) to grow your investment pot tax-free. People ages 18-40 qualify for the Lifetime Isa scheme whereby the government tops up a portion of your savings per year.
Pick your platform
Whether you want to open an Isa, Sipp or invest in international stocks, your first port of call is an investment platform.
The range of platforms available in the UK today means you should be able to find one which suits your needs. If cost is your priority, our guides show where you can find the cheapest providers; or if service is important, we have ranked the platforms accordingly. We have also answered your key questions on Isas, Sipps and international investing, to help you get going.