Our friends at P2P Finance News run a nicely written piece of advertorial, aimed at persuading the reader of the benefits of diversification, or spreading risks in investment. We carry an excerpt from the piece, because it makes good sense – you can decide whether you want to buy the book it’s plugging for yourself.
If you’re a novice investor, you have probably heard the term ‘diversification’ bandied about a few times, often extolled as an identifier of a strong portfolio. However, while many people understand the importance of diversification, few people understand what this truly means in practice.
A diversified portfolio is more than just a physical description of a portfolio that contains a variety of assets and interests. It is a long-term investment strategy that requires a strong ability to assess risk and identify opportunities as they arise. Let’s take a closer look at the central tenets of diversification, as well as some examples of when it has been done the right way.
First, let’s explain what diversification is and why it is such an important part of any investment strategy. As this comprehensive guide to trading stocks and shares explains, there are many different factors that affect the daily price fluctuations of certain assets, with market sentiment being chief among these. Market sentiment is what leads to speculative bubbles, which can and invariably do ‘pop’ at some point, depreciating the price of the asset being speculated upon.
Diversification is a way to shield your portfolio from the ravages of the market, by guaranteeing that a price crash of a particular stock or asset does not wipe you out. It is a way of hedging your bets and multiplying your chances of success and profit. It means spreading your capital across a broad range of stocks and shares that represent a wide variety of different industries so that a bad day for one industry does not mean a bad day for your entire portfolio.
Diversification in your loan portfolio
Money&Co. loans are typically asset-backed, meaning Money&Co. has a charge on behalf of its lenders over an asset, usually a property. Money&Co. will ensure that there is sufficient headroom to allow for any financial shocks and that it will be able to recover lenders funds if the borrower is in default. Nonetheless, lenders must understand that their capital is at risk.
As the client, your portfolio will be managed according to parameters agreed with you at the outset. You can elect to have interest from your loans paid out twice annually, or retained in your portfolio for reinvestment.
Historical Performance And IFISA Process Guide
That figure is the result of over £21 million of loans facilitated on the site, as we bring individuals looking for a good return on capital together with carefully vetted small companies seeking funds for growth. Bear in mind that lenders’ capital is at risk. Read warnings on site before committing capital.
All loans on site are eligible to be held in a Money&Co. Innovative Finance Individual Savings Account (IFISA), up to the annual ISA limit of £20,000. Such loans offer lenders tax-free income. Our offering is an Innovative Finance ISA (IFISA) that can hold the peer-to-peer (P2P) business loans that Money&Co. facilitates. For the purposes of this article, the terms ISA and IFISA are interchangeable.
So here’s our guide to the process:
The ISA allowance for 2019/20 is unchanged from last tax year at £20,000, allowing a married couple to put £40,000 into a tax-free environment. Over three years, an investment of this scale in two Money&Co. Innovative Finance ISAs would generate £8,400 of income completely free of tax. We’re assuming a 7 per cent return, net of charges and free of tax here.
Once you have made your initial commitment, you might then consider diversifying – buying a spread of loans. To do this, you can go into the “loans for sale” market. All loans bought in this market also qualify for IFISA tax benefits.
Risk: Security, Access, Yield
Do consider not just the return, but the security and the ease of access to your investment. We write regularly about these three key factors. Here’s one of several earlier articles on security, access and yield.