Is there tax relief in Portugal if I am downsizing my home?

By Mark Quinn
This article is published on: 27th January 2022

27.01.22

As I covered in a recent blog post, capital gains tax is charged on the sale of all property sold by a Portuguese tax resident, irrespective of where the property is located, or if it was your main residence or not. Capital gains tax is also payable by non-residents who sell property located in Portugal.

To briefly recap the rules:

If you are a Portuguese tax resident and sell a property located in Portugal, capital gains tax is payable on 50% of the gain. This amount is added to your other income for that tax year and is taxed at the scale rates of income tax (14.5%-48%). If the property was held for more than 2 years, inflation relief is given
If you are not resident in Portugal but you sell a personally owned property in Portugal, 100% of the gain is taxable at 28%. If the property was held in a non-Portuguese company the rate is 25%, or 35% if the company is based in a backlisted jurisdiction
If the property sold was purchased before 1st January 1989, no capital gains tax applies

Despite the potential for high taxation, if the property sold was your main home there are two reliefs you can take advantage of to reduce or eliminate your tax bill:

Reinvest the net sale proceeds into another main home in Portugal, or EU/EEA;
Reinvest the net sale proceeds in an approved long-term savings plan or pension; or
Use a combination of the above 2 options. This is useful if you wish to downsize

Any portion not used to purchase another main home or not reinvested in a savings plan/pension will be taxed.

In order to qualify for the reliefs there are certain hoops you will need to jump through. Let’s look at each in turn.

If you choose to reinvest the proceeds in a new main home:

The property sold must be your main home.

You must purchase your new home within a certain time frame. This is a period of 5 years; 24 months before the sale of your previous home and 36 months after the sale
You or your family must occupy and live in the new property within 36 months of the original sale
The new home must be in the EU or EEA
The new home must be real estate, this can include land for development. It cannot be a boat or caravan
You must declare the necessary details on your annual tax return. It is best to work with your accountant to ensure this is done correctly as the reporting will be over several years unless you sell and repurchase property in one single tax year. If not done correctly, you will lose the relief

The above is all well and good if you want to buy a new property valued at the same price as the property you sold, but what if you do not?

Contact Mark now with your questions

The Portuguese government introduced a relatively new relief allowing you to reinvest the proceeds, or a part of the proceeds, in a long-term savings plan or pension rather than another property. Again, there are certain rules in order to qualify, but this can be a particularly advantageous option for those wishing to downsize.

The main conditions for qualification are:

On the date of transfer of the property the taxpayer, spouse or unmarried partner is in retirement or is at least 65 years old
The investment into the structure is made within six months from the date of sale
The property sold is the main home
Withdrawals from the structure are limited to a maximum of 7.5 % p.a. of the amount invested
You must declare your intention to invest the funds in such a structure on your tax return in the relevant year

Whether a pension or a long-term savings plan is right for you will depend on your personal circumstances and the structure must qualify in order to obtain the tax relief, so it is important to take advice.

Inheritance tax living in Catalonia, Spain

By Chris Burke
This article is published on: 26th January 2022

26.01.22

With all that has been happening the last couple of years with Brexit and the Covid 19 pandemic, it could well have slipped by many people that significant changes have been made to the inheritance tax laws in Catalonia. This will particularly affect those who are resident here and receiving an inheritance from someone who is a non-resident of Catalonia.

Prior to 2020, spouses and descendants received large allowances in respect of tax due to be paid, starting from 99%. However, for those receiving inheritance as a descendant this has been reduced, at the worst to only a 60% reduction. This raises two main questions. Firstly, how much tax will you have to pay if you receive an inheritance, and secondly, is there an alternative way to receive this inheritance, for example as a gift rather than an inheritance, which has a different rate of tax?

It is important to understand how an inheritance is taxed in Catalonia. Major factors are the relationship between the deceased and the inheritor, what asset is being received and where the money comes from, i.e. which country. In the UK it is fairly straightforward: if someone dies as a resident in the UK and leaves you assets up to £325,000 there is usually no inheritance tax (paid by the estate) to pay due to the nil-rate band. However, anything over this amount is usually is taxed at 40%. However, in Catalonia it is not that simple (surprise surprise, I hear you say!) and alongside what is declared and what you may have to pay tax on in the UK, you must also declare and pay the relevant tax in Catalonia. Any assets you already own can also be taken into the equation of what tax is payable.

Inheritance tax in Catalonia is paid by the receiver, not the estate, and very importantly, you have 6 months to declare this inheritance. Even if you haven’t yet received the inheritance (this is from the date of decease), you must declare it within 6 months or else you will be fined the following way on the amount of tax you are liable to pay:

5% in the following 3 months (i.e. months 6-9 since death)
10% from 3 months to 6 months
15% from 6 months to 12 months
20% plus interests after 12 months

However, if you know that you need more time you can ask for an extension of an additional 6 months. This must be requested in the first 5 months following the death. In this case, the surcharges described in the above table will not be applicable and you will have an extra period of 6 months.

If you have questions, please contact Chris Burke

There are some discounts on inheritance tax in Catalonia. To start with, there is usually no tax to pay on the first €100,000 received if you are a spouse or child of the deceased. For other descendants, the allowance is €50,000. If you are an ascendant the allowance is €30,000 and for any other relation the reduction is €8,000.

From this point on, there are further reductions between 97-99% and other factors are to be taken into account, such as if the children are under 21, disabled, or if you receive the main home (“vivienda habitual”), family business or shares in certain types of companies.

As you can see, the calculation is not straightforward. I feel the quickest and simplest way to give you an idea of what tax you would pay is if I give examples using the most typical scenario of people we help. This scenario is of a parent resident in the UK leaving their child, who lives in Catalonia, an amount of money/assets not including property (as we said there would potentially be extra tax deductions for receiving this). The guidelines are shown below for someone tax resident in Catalonia, over 21 years old, owning assets themselves of less than €500,000. Note that the ‘domestic trousseau’ has also been included (the domestic trousseau is a tax on inherited household items, for example furniture, by default calculated as 3% the estate value):

Amount to be inherited	Tax due in Catalonia
€100,000	€84
€250,000	€6,969
€500,000	€29,888
€750,000	€64, 908
€1,000,000	€109,297

One possibility we investigate for our clients is whether it would it be better to plan the future inheritance and anticipate it, receiving the monies through a donation that is taxed between 5% and 9% between parents and their children (with some specific requirements). Additionally, please note that if a previous donation has been made, this must also be considered in order to calculate the effective inheritance tax rate. We always suggest getting in touch to confirm exactly what the amount would be, and for help declaring it. For the assets themselves, it is worth noting that whilst living in Catalonia it is not always efficient to have many overseas assets.

For example, investments or ISAs in the UK are declarable and tax is payable in Spain on any gain annually EVEN if you do not withdraw any of the money, unlike in the UK. It is possible to hold these monies in a Spanish tax-efficient structure, such as a Spanish Compliant Investment Bond, remaining in sterling as opposed to Euros if you prefer. In this way, you can benefit from the money growing through compounding with potential to greatly mitigate tax. This is where we can add value to help our clients effectively organise their assets, and we can manage the assets if need be.

If you have any questions relating to this article or would like help planning for this eventuality, or anything similar, don’t hesitate to get in touch.

Irish Pensions Transfers | What are your options?

By David Hattersley
This article is published on: 25th January 2022

25.01.22

Over the years there has been an ebb or flow of people between the UK, Ireland and also the EU/EEA. There is a strong link due to the common language between the UK and Ireland, with workers moving between both countries. There is a large Irish community in the UK from those who emigrated due to the high unemployment and lack of opportunities in Ireland for many years. Two things changed that trend: joining the EU in 1973 and the subsequent “Celtic Tiger “, which reversed the trend with Ireland becoming a net destination of immigration. It also has led to a change in demographics and the advent of multi-culturalism. However, the boom collapsed, for many reasons, and Ireland fell into recession in 2008, after their banking crisis. Irish youngsters then emigrated to Australia, the UK and elsewhere, to pursue careers or a better way of life.

As the world began to recover from the banking crisis and confidence was returning, the Covid pandemic hit the world. The ensuing restrictions created job losses in the retail, leisure, tourist and airline industries. There are still concerns over the unresolved issues of Brexit and the emergence of Omicron, but despite this Ireland has managed to stage a recovery on the back of the activities of multinational companies, financial services and supported by a domestic recovery, as reported by European Commission’s autumn economic forecast in 2021.

Contact David if you have further questions

There are many advantages to travelling – one’s perspective changes. But after moving abroad to live, work or retire you might find yourself with pensions scattered across different countries.

So when should you consider an Irish Pension Transfer? If you no longer reside in Ireland it is possible via a Malta based QROPS, provided certain criteria are met. Detailed below are some points to consider.

You have accumulated defined contribution pension plans in both the UK and Ireland
You have an Irish defined benefit scheme and you may be restricted by the trustees as to when benefits are taken, or their choice of investments
You are unhappy with the choice of fund offerings or selections
You wish to diversify the currencies of the assets
You wish to “mix and match” different quality fund managers and their styles, with the ability to change these within the wrapper
You may want to take retirement benefits earlier, between 50 and 60
You need flexibility when taking pension income benefits and to be able to vary these according to your needs or change in circumstances, e.g. taking benefits after redundancy, and then gaining new employment or an alternative career
Malta has a wide range of Double Taxation Agreements (DTA) in force whereby pension income is payable gross automatically and is assessable in the country of tax residence

A full assessment of your needs will of course be carried out to ensure that your objectives can be met, so feel free to contact me on my email below to start the process.

Arts Society de La Frontera ‘Live’

By Charles Hutchinson
This article is published on: 24th January 2022

24.01.22

After a gap of nearly two years due to Covid, The Spectrum IFA Group again co-sponsored an excellent Arts Society de La Frontera “Live” lecture on the 19th January at the newly renovated San Roque Golf & Country Club on the Costa del Sol. We were represented by one of our local and long-serving advisers, Charles Hutchinson, who attended along with our co-sponsors Smart Currency Exchange represented by Dean Biddulph. Also present was the society’s European Chairman Jo Ward.

The Arts Society is a leading global arts charity which opens up the world of the arts through a network of local societies and national events throughout the world.

With inspiring monthly lectures given by some of the UK’s top experts, together with days of special interest, educational visits and cultural holidays, the Arts Society is a great way to learn, have fun and make new and lasting friendships.

At this event, over 50 attendees were entertained by a talk on the 1920’s Dustbowl of California, Oklahoma and Texas by John Francis, who is one of the UK’s top experts on this subject. He gave an excellent lecture, revealing to us how this terrible time in US history spawned a number of well known artists and singers, as part of the aid package produced by President Franklin Roosevelt to stimulate recovery.

The talk was followed by a drinks reception which included a free raffle for prizes including CH supplied lovely Art Deco flower vase, a book on the subject and Brandy. Smart Currency Exchange also supplied champagne and a crystal decanter and glasses.

All in all, considering many people are still nervous about large events, it was a good turnout and a successful event at a wonderful venue. The Spectrum IFA Group was very proud to be involved with such a fantastic organization during its current global expansion and we hope to have the opportunity again at the March lecture.

ESG – Responsible Investing

By Mark Quinn
This article is published on: 20th January 2022

20.01.22

Many investors are turning to environmental, social and governance responsible investing – otherwise known as ‘ESG investing’. In fact, between 2019 and 2020 the flow of wealth into such funds has more than doubled, and the sector has seen a 42% (US$17.1 trillion) increase since 2018 according to a 2020 Trends Report.

What is ESG investing?
It is not the traditional ‘avoidance of bad’ companies or sectors, like oil or munitions. It covers a broad range of non-financial factors applicable to all industries and individual businesses, such as:

Environmental – climate change, carbon emissions, pollution, biodiversity, deforestation, water security.

Social – data protection, equal opportunities, working conditions, human rights, child labour and slavery, philanthropy.

Governance – business ethics, security pay, bribery and corruption, political lobbying and donations and tax strategy.

Whilst these are not commonly part of mandatory financial reporting, companies are increasingly making such disclosures on their financial reports, and official bodies are making changes to define, homogenise and incorporate these factors into investment processes.

So, what is driving this change in investment ideology?
Firstly, growth in the sustainable sector has outperformed other more traditional sectors such as auto and energy, and importantly have proved lower volatility during the Covid pandemic.

We saw markets take a battering during the initial phase of the pandemic in February and March 2020, but according to analysis by Morningstar, 66% ESG funds ranked in the top half of their categories and 39% ranked in the best quartile during these months.

There is also Morningstar research showing portfolios with ESG and sustainable funds perform better in the long term. They found that over 10 years, 80% of blended sustainable equity portfolios outperformed traditional funds. Moreover, 77% of ESG funds that existed 10 years ago are still going, compared to 46% of traditional funds.

There has also been an increased demand from retail and institutional investors, and it is not just the younger generation. 80% of asset owners across all age groups are incorporating sustainable and ethical investments within their portfolios. This is supported by Morningstar’s recent poll in the US which showed that 72% of adults had a moderate interest, with 21% expressing a high interest, and only 11% preferring to focus on the more traditional higher return industries. Likewise, financial advisers believe their clients are more committed to ESG investing, with research showing 74% of clients are incorporating such funds in their portfolios, up from 30% in the previous 2 years.

Legislation has also had its part to play. Denmark, France, Hungary, New Zealand, Sweden and the UK, have made carbon-neutral targets law, with the US and a further 23 countries committing this to policy. A further 132 countries have committed to becoming carbon neutral by 2050. This trend and development at a governmental level will provide further opportunities for ESG investors.

Download our guide to ESG Investing

What can we expect in the future?
It appears that the demand for ESG investments will only continue to rise, and there are expectations that this industry will increase 433% between 2018 and 2036 to US$160 trillion.

This movement is supported, and pushed on, by institutional investors such as Amundi (the largest EU asset manager), who announced that it would use ESG in 100% of its investments by the end of 2021. Similarly, Blackrock (the world’s largest asset manager), will increase its sustainable asset holdings to US$1 trillion by 2029, up from US$90 billion in 2019. Such support from the ‘big boys’ will not doubt fuel demand at both retail and institutional levels.

At an individual level, investors are embracing the movement and supporting renewable energy. They are actively making choices to fight climate change, and this is no longer simply taking your reusable bag to the supermarket, it is entering our investment portfolios.

Download our guide to ESG Investing

Investment performance and reliability

By Jozef Spiteri
This article is published on: 20th January 2022

20.01.22

Investment decisions can be confusing; there are just so many options! The most important thing to check is that the assets selected suit your profile and needs, and that the company handling your money is financially sound with a solid reputation. One range of funds we find works consistently well for our clients here at The Spectrum IFA group is from Prudential International. These funds are called PruFunds.

PruFunds start off by spreading investments across different asset classes. The various funds on offer contain assets such as equities, bonds, property, commodities and cash. This balances the performance of the funds as a whole, avoiding the volatility that comes when money is invested in a single asset class. This is known as diversification. All PruFund funds are managed by Prudential’s specialist and highly successful multi-asset portfolio management team. The size of these funds allows Prudential to invest in a wide range of assets globally and across many economic sectors, further adding to the diversification.

The second notable and valuable feature of PruFunds is its ‘smoothing’ mechanism. The particular attraction of the smoothing process is that investment profits are held back from market highs to protect your investment from suffering the full lows of market crashes. A steady return is something most investors greatly appreciate.

PruFunds are widely recognised for strong long-term investment performance, reliability of returns and insulation from stock market volatility. This protection from volatility, achieved through the risk-managed smoothing mechanism, is a feature of the funds which is particularly appropriate for investors seeking a balance between capital growth and preservation.

This is just a taste of what PruFund has to offer. If you have further questions, or wish to have a closer look at the various fund options available, feel free to contact us. Our initial meetings are free of charge and entirely without obligation.

Find out more about the PruFund here

How do I deal with inflation?

By Andrew Lawford
This article is published on: 18th January 2022

18.01.22

“The only function of economic forecasting is to make astrology respectable”
JK Galbraith

This opening quotation might seem somewhat defeatist. Surely economic forecasting, given the importance of the economy’s performance on our investments, must be necessary. The problem is that in order to have a useful piece of information, that information must be both important and knowable. There is no doubting that the economy’s future performance is important information for us investors, but to what extent can we know it?

At the risk of using excessive quotations, there is a good story from Kenneth Arrow, who subsequently won a Nobel Prize in Economics in 1972, about his time analysing long-range weather forecasts in World War II. He came to the conclusion that there was no difference between the forecasts and pure chance, and communicated this finding to his superiors. The following is the memorable reply that he received: “The Commanding General is well aware that the forecasts are no good. However, he needs them for planning purposes.”

Which leads me on to inflation, without a doubt the economic piatto del giorno being served up in all current market analyses. Following a 2020 – 2021 in which it was decided, essentially on a global basis, to close down pretty much every non-essential activity and subsequently to apply massive amounts of government stimulus in the hopes of starting things back up again, we are finding a large number of anomalous economic effects. I imagine many people will have their own stories to tell, but my particular one is this: my son got to the point where he needed a new bicycle, having outgrown his previous one. A couple of years ago, this would have been as easy as going down to the local bike shop, choosing the model and swiping my credit card. This time, however, the bike shop told me that they hadn’t had a delivery of new bikes in two months due to logistics problems. They were, however, very happy to take my son’s old bike, a buyer for which was found in a matter of hours.

There have been plenty of variations on this theme in recent times, and it would appear that the process of economic restarting, with its attendant logistics issues, has fed into the current levels of inflation that are being reported. However, it seems unwise to extrapolate one observable trend and conclude that there is some inevitability about inflation remaining at its current high levels. This is the essential problem with economics: modelling extremely complicated systems such as economies is all but impossible: there are simply too many factors to take into consideration and the interactions between them all are unclear.

Contact me now with your questions

Of course, if we are investing, then it does seem like we have to take a view on macroeconomics and position ourselves accordingly. Financial newspapers exist to provide daily analysis of current trends and allow various experts to opine about their future path. There is little downside for those prepared to make forecasts: if they happen to be right about some particularly important phenomenon, they can trumpet for all time how they called the event. Their many incorrect calls, on the other hand, will be studiously forgotten about. If we extend this reasoning to well-known hedge fund managers, those who appear to have the Midas touch, we find ourselves subject to what is known as “survivorship bias”: for the few investors with truly long-term records, there are many others who have fallen by the wayside and whose investing results have been lost in the mists of time. This gives us the impression that there are gurus out there who know exactly what is going on in the economy, but it doesn’t correspond to the hard reality of investment: most truly successful investors don’t have a strong view on macroeconomic trends, because they understand that they are unknowable and that any market timing decisions based on forecasts are fraught with difficulty.

So if we can’t divine what is going to happen in the economy, can we know anything that is of use for protecting and growing our investments over the long-term? It turns out that the most important thing for investors is the mere fact of remaining invested. JPMorgan has shown that over the period from 1999 – 2018, the average return on the S&P500 index, the most important aggregate of US shares, was 5.6% p.a. However, your return would have been a paltry 2% p.a. if you had missed the 10 best days of that period, and you wouldn’t have made any money at all if you had missed the 20 best days. Keep in mind that those returns were produced notwithstanding several gut-wrenching market moves associated with the tech bubble bursting in 2000 (which led to three years of negative returns) and the financial crisis of 2008. If we zoom out even further, the annual returns for the US stock market in the post-war period have been positive in about 70% of the years. Those are odds that you want to take.

I should add as a proviso to the above that you need to have invested intelligently, and by that I mean choosing quality asset managers that are worthy, long-term stewards of your capital and who put your interests as clients before their own. It should, of course, be a given that financial professionals put their clients’ interests first, but the various scandals over the years have shown that one can never be complacent in this regard. My job as financial adviser is to help you to choose quality investments and to make sure that you understand the basic tenets of investment and stay with it for the long-term. If you’d like to discuss your own situation further, please don’t hesitate to get in touch for a free initial consultation.

With all of the above, I don’t mean to diminish the importance of inflation, but we need to keep it in its proper context: this isn’t a problem that has suddenly come out of the woodwork! It has been there all along, working quietly in the background to chisel away at your wealth. The graph below shows the effect of different levels of inflation over a number of time periods.

Contact me now with your questions

It should be clear that even modest levels of inflation can prove very pernicious – taking the example of a 2% inflation rate over a 20 year period, you will find that prices have risen almost 50%, and so if your capacity for generating income hasn’t risen commensurately, you will find yourself dedicating ever more of your resources to the bare necessities, leaving you less money available for discretionary expenditure. We are told that we have lived through a couple of decades of very low inflation, but I distinctly remember the prices of milk, fuel and train travel (between where I live and Milan) when I arrived in Italy in 2004, and the inflation rate based on these basic goods and services is in the region of 2 – 3% p.a. over the period 2004 – present day (the official value is about 1.3% p.a.). There is no need to get into a debate about how inflation is calculated – I fully recognise that some goods (like consumer electronics) have improved and become cheaper over this period, but I buy fuel for my car far more frequently than I buy a smartphone.

The effects of inflation on your economic well being often become clear only after a long period of time, so the best idea is to work out a plan right from the start to make sure that your expenses are going to be sustainable in the long-term. Doing this can be quite difficult however, as you need to factor in variable investment returns, withdrawal rates and inflation in order to see how your plan is likely to play out. Investing for a positive real return (a real return is adjusted for the effects of inflation) over time relies on taking a long-term view and, as with choosing the right investments, my role as financial adviser is to help you understand all the variables and to find a sustainable path for the future. If you worry about inflation, then you are right to do so, but I can help you in finding ways to protect yourself from its worst effects.

Please also check out my latest podcast – dedicated to citizenship, visas and estate planning, available on Spotify, Google Podcasts, Apple Podcasts and Stitcher.

Investment options

By Jozef Spiteri
This article is published on: 18th January 2022

18.01.22

Trust in the financial sector

Choosing investments can be daunting to someone who does not have a good understanding of financial matters. It is normal to feel intimidated when facing something you don’t understand, and it is a reaction many people have when considering investing their money.

For these people, the ideal investment is often something they can see and touch. Such investments are usually the purchase of property to let, or the establishment of some sort of business selling goods or services. Done correctly such ventures can be very profitable, but these types of investments require a lot of time and money, so they might not be suitable for most people.

An alternative is investing in financial markets, but how can you overcome the mental block when attempting to allocate your money? The best first step is to consult an adviser who will walk you through the key points of such investments, explaining the potential risks and also rewards of different investment options, and who will take the time to come up with the correct solution for you.

However, the most important step to get more comfortable with financial markets is to actually start investing. An analogy I like to use is of a person who has never been swimming, fearing that something terrible would happen if they were to get into the water. Typically, they would start by dipping their toes and legs in, getting a feel for this un-chartered territory. Once they feel comfortable, they will continue to walk further out, until eventually they will be completely at ease in the water. This is the approach new investors should take when looking to enter this “new world”.

If you are feeling confused or overwhelmed with all the different investment options available to you, feel free to reach out to one of our advisers. In the initial meeting we will be able to help you understand better what will suit you best and can answer all the questions you might have. All initial meetings are free of charge and there is no obligation to proceed with an investment.

Selling a property in Portugal | Tax relief

By Mark Quinn
This article is published on: 17th January 2022

17.01.22

As I covered in my last blog post, capital gains tax is charged on the sale of all property in Portugal irrespective of your residence status, and if the property qualifies as your main residence.

There are two situations in which the capital gain is exempt from Portuguese tax:

If you invest the proceeds of sale into another main home in Portugal, or EU/EEA
If the proceeds of a property sale are reinvested in an approved long term savings plan or pension

Any portion not used to purchase another main home, or reinvested in a savings plan/pension, will be taxed.

Whilst the first exception is relatively straightforward, the second exemption method is slightly more involved and there are certain conditions that must be met, such as (but not limited to):

On the date of transfer of the property the taxpayer, spouse or unmarried partner is in retirement or is at least 65 years old.
The investment into the structure is made within six months from the date of sale.
The property sold is the main home.
Withdrawals from the structure are limited to a maximum of 7.5 % p.a. of the amount invested.
You must declare your intention to invest the funds in such a structure on your tax return in the relevant year.

We can advise on the conditions and structure options in which to hold a qualifying investment.

Investment diversification

By Jozef Spiteri
This article is published on: 12th January 2022

12.01.22

A word which seems so simple, a concept that many think they can easily master, but do you fully appreciate what diversification means? If you check the meaning of diversification, you would find that in business terms it is usually the act of varying the range of products or services offered, or broadening the field of operations. In investment terms it has a similar meaning. Diversification involves spreading your money across different assets and asset categories.

Most of the time when people tell me that they are investing and I ask them if they have Investment diversification, I am met with a resounding “Yes, of course”. They then might go on to explain what they invested in and it is usually things which they would have come across on social media or heard about from another “investor”. These portfolios might comprise shares in a few US companies, a couple of US bonds and possibly some cryptocurrency for a touch of risk. Such a portfolio would seem OK to someone who had just begun investing some spare cash, but is it diversified?

Such a portfolio is not really diversified at all, and I will explain why. Starting off with the first part which is an investment in a few different shares. Firstly, they are all from one geographical region, meaning if something dramatic happened in US stock-markets, they would probably all be affected to some extent. Secondly, inexperienced investors often buy shares based on something they have read online or something they have heard from a friend or colleague. These investments are typically in growth stocks, in other words shares in companies which are perceived to have strong earnings potential and growth prospects, but often with a correspondingly high share price. Investing exclusively in this type of company may prove successful but also carries significant risk, as the expectation of highly profitable growth (sometimes reflected in an inflated share price) may not be realised for many years, if at all. This is why it is sometimes sensible to include more mature company shares in a portfolio, or possibly shares in a company paying good and sustainable dividends.

Moving on to the bond part of the portfolio, often this would be one or two bonds issued by the US government, maturing in say 10 years. It might also include a corporate bond to add a little bit of diversification. But how much attention has been given to the financial strength of the company issuing the bond or the bond’s yield to maturity (how much is received in regular income up to the date the bond matures). These are just a couple of basic questions that should be asked when considering direct investment in a corporate bond.

This brings us to the cryptocurrency portion of the portfolio, often consisting of holdings in popular names such as Bitcoin or Ethereum, or in a new ‘crypto’ trending online. Although I have nothing against a small allocation to cryptocurrency, it should always be treated as speculative with the likelihood of volatility and a high risk of capital loss. I sometimes question whether people investing in cryptocurrency understand the basics of this asset class, including its regulatory status and its ability to function as a currency. To read more about cryptocurrency – click here

One question all investors should be asking about diversification is how to achieve maximum returns with minimum risk. Or, put another way, how to make the most of their money without jeopardising their financial security. A well-diversified portfolio should include exposure to a range of asset classes, for example shares, bonds, property, commodities and cash. Investments should also not be restricted to a single country or geographic region, nor to a single theme or economic sector.

In practice, most people do not have the time or knowledge required to build a well-diversified portfolio which achieves the right balance between risk and reward, between capital growth and capital preservation. At Spectrum, on behalf of our clients, we therefore focus on identifying professional investment managers who specialise in maximising returns from efficient portfolio diversification.

If you have any questions regarding asset diversification and investment returns, our advisers are available to help. We do not charge fees for initial consultations and you have no obligation to use our services after meeting us. Please get in touch to learn more.