asset allocation and DIY investing

Over fifty percent of the UK’s population are not saving at all or are not saving enough to provide them with the standard of living they would like when they retire. With the pressures on the state pension pot, it is becoming increasingly clear that it is down to you to take ownership and manage your financial future.

DIY (do-it-yourself) investing can be a cost-effective way of controlling where to invest your money. Rather than paying a third party, a DIY investor will pick and manage their own investments via a fund manager, a DIY investment platform, or an adviser. The difficulty with DIY investing is that it can be time consuming, stressful, and complex. However, if you are willing to accept this and think long-term, DIY investing can be very lucrative with the potential to substantially increase your wealth.

Don’t put all your eggs in one basket

When building your investment portfolio, one key piece of advice is not to invest all your eggs in one basket. Asset allocation is key. Assets you may hold are cash, bonds, shares, and property. Each offers a different level of risk and different expected returns. Cash and bonds offer more certainty but lower returns, while shares are riskier but can offer higher, inflation-beating returns in the form of share price and dividend payments. Property sits between shares and bonds. Asset allocation can boost your returns, or lower the level of risk of your portfolio.

What is your risk appetite?

The often-cited Barclays Equity Gilt Study shows that £100 invested into shares in 1945, with dividend income reinvested, would be worth £131,469 in 2010. Squirreled away as cash with interest reinvested it would be worth £61,195. If we looked at the same £100 invested into a bond or gilt, a five-year bond with a coupon of 2.5% will pay you £2.50 a year for five years after which you should get back your £100 plus interest of £12.50. What is your risk appetite?

Let’s explore asset allocation in a little more detail.

  • Cash investments offer a low return compared to other investments. They are associated with very low levels of risk and are protected by the FSCS up to £85,000.
  • Investing in shares is a popular option allowing you as an investor, to own a small share of a company. If it is consistently profitable and well run, the share price should rise. Some companies offer shareholders a share of the profits through dividend payments.
  • Bonds are issued by companies and governments offering a set interest payment per year. As their return is more certain than shares and as you are promised your money back at maturity, they’re considered to be lower risk than shares. You can pick individual bonds but investment funds are the most popular way to invest in bonds.
  • Direct Lending is an alternative investment option for investors seeking to secure higher returns by lending money direct to businesses via lending or peer to peer lending platforms. The last few years have seen Direct lending establish itself as a mainstream asset class; offering investors a credible, and potentially stable addition to a well-balanced and diverse investment portfolio. You will, however, need to assess the risk reward ratio and be aware that loans can and do sometimes go wrong.
  • Property takes many forms from buy-to-let to property fund investment. You can earn a return either via rental income or through selling for a profit. You can also invest indirectly in property by investing in a fund that invests directly in property lending.

Active or passive funds?

Another option would be to invest in active or passive funds. This allows investors the opportunity to invest in a broad range of assets including property, bonds, shares, and other investments. With open-ended funds i.e. Open-Ended Investment Companies (Oeics) and unit trusts, the fund grows as more investors buy-in and diminishes as investors sell out of it. All dividends received are provided to investors. Investing in close-end funds i.e. an investment trust, allows you to own a stake in the asset portfolio of a trust.

Spread your risk through diversification

No one likes to lose money so it is vital to manage and understand the risks. They key is to spread your risk through diversification; invest in a variety of different ways and don’t use your ‘rainy day’ fund. Remember, investing is a long-term game and some losses along the way are inevitable.

 

*Warning: nothing in this article should be construed as advice. Your capital is at risk.

About BondMason

BondMason, the UK’s leading Direct Lending specialist, makes it easy for investors to target gross returns of 8%+ p.a. by enabling clients to invest in Direct Lending the smart way. Our Senior Investment Team has a wealth of relevant experience – each with over 15 years’ investment experience in financial institutions; including Fidelity, Blackstone, Ares, Lloyds, Babson and JP Morgan.

Through hours of in-depth research, face-to-face meetings, and a robust due diligence process, our experienced investment team only approves a select number of lending partners and peer to peer lending platforms to work with. In fact, although we’ve reviewed over 100 potential lending partners, we have only approved 26 to-date.

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Steps to succesful investing in Direct Lending

To find out more about how to make informed decisions about your lending portfolio, download your free copy of Steps to Successful Investing in Direct Lending.

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