Our 7 Step Investment Action Plan – Part 1 – Diversification

2013 was quite a year in investment terms – many clients will have portfolios in need of some serious spring cleaning in 2014. We have put together a 7 step action plan for 2014 – part one is below. Stay tuned for more over the next week or two.

The old saying goes, “don’t put all your eggs in one basket” and it has long been the case that when considering an investment portfolio, diversification across different asset classes is of the upmost importance in order to manage risk and return.

While diversification across asset classes is as important now as it always has been, given the increasing speed of change in both the political and regulatory environment, it makes sense to diversify across product types as well.

For example, pension plans offer highly generous tax reliefs to investors as well as tax efficient fund growth, however they also have restrictions in terms of the amount that you can save and the age at which you can gain access to the funds.

Pensions are especially prone to legislative change and recently seem to have become a politically easy target for the government to extract further taxation from more wealthy savers. As such, while a pension plan will form the bedrock of most retirement plans, it makes sense to include some other “product types” to lessen the impact of an adverse change in pension planning rules. An increase in the minimum pension age (from 55 to 60) for example would throw many retirement plans off course. Holding a suitable range of other “product wrappers” such as ISA’s and investment bonds will mitigate this risk.

The tax treatment of product types is also prone to change. There has been talk in the media of government plans to reduce the level of tax relief available or further limit the total allowable lifetime savings within a pension plan. Conversely, there is pressure to increase the amount of tax-advantaged savings allowed in an ISA each year to encourage the public to save and invest.

Given that the time horizon for some investments is 30 years or more, it seems almost inevitable that some form of taxation or legislative change will impact on the plan before it completes. It is vital to review your plans on a regular basis to ensure that they remain suitable for your circumstances over time.