Desperately seeking diversification

23rd October 2015 by Karina Sidenius

In life, there are small worries and big ones. Things like did I remember to feed the cat today, am I over or under dressed, is my daughter eating enough vegetables?

Can I manage my mortgage if something unforeseen happens? Will I have enough to provide the retirement I want? How can I protect my money from the ups and downs of world markets?

It hasn’t always been easy to find answers to the bigger ones. Particularly the last.

The recent Positive Pensions Survey, an independent survey of 2,000 UK adults, found that almost half (47%) of us worry about the effect of global stock market shocks on our pension holdings. That’s despite the stock market historically achieving the best returns for investors – even more so when they reinvest.

But this concern is really no surprise. In recent months, and for the second time within a decade, global markets have seen significant falls. It’s been a domino effect: Chinese growth slows, the stock market slumps and very quickly American, British and European markets follow.

They’re inextricably linked. Now, when you’re investing in the FTSE 100 you’re also effectively investing in the S&P 500, Nasdaq, Hong Kong stock exchange, Shanghai, Brazil, Australia. And so on.

The reason why is because the weighting within our markets has changed. Take the FTSE 100 as an example. In bold is the change in weighting as a share of this market since 1999.

Basic materials: 5.91% (basic resources, construction & materials). +2.28

Consumer goods: 12.89% (personal & households goods). +7.35

Oil and gas: 12.33%. Down from 16.2% last year and 12.8% in 1999. -0.47%

What does this mean?

If our money is invested in this index, at least one third of it is exposed to global market fluctuations. So when the global price of oil is down, or China over produces basic materials, or consumer goods, that has a direct impact on your pension.

It should then come as no surprise that 44% of us are interested in options that allow us to reduce our exposure to the same.

Traditionally, this has been achieved by holding ‘uncorrelated assets’ like cash or bonds. They aren’t so simple a solution any more.

Bonds are increasingly connected to global events, as the liquidity of our government relies on the liquidity of other governments and companies too.

Similarly, you can hold some of your money in cash but with interest rates at near-zero and inflation hovering around the same, it’s certainly not growing.

That’s not necessarily bad. Cash and bonds still have a role to play in a diversified portfolio, and likely always will. What it does mean is that we have to look a little harder to find truly uncorrelated investments.

What has emerged in recent years is that alternative finance such as peer-to-peer lending is an accessible way in which to do this.

At Abundance, we sell tradable Debentures in energy projects. The return investors receive is solely linked to the energy produced by an individual project (or projects) and, just as in stock markets, they can sell their holding at any time.

Like with dividend payments, capital and income repayments can be reinvested over time to boost returns and build your pot of money away from the stock market.

And because almost all peer-to-peer lenders operate entirely online, fees can be lower, which makes it an option open to most people.

With the recent launch of the world’s first peer-to-peer pension, we’re extending the benefits of diversification to your retirement income. It’s one of the lowest cost around and gives you returns that, while still having an element of risk, as any investment does, offer a place to invest that isn’t going to be influenced by stock market movements.

Risk warning

The Abundance Pension is a self-invested personal pension (SIPP) provided by European Pensions Management (EPM), who are authorised and regulated by the FCA (461099). Setting up an Abundance Pension involves entering into a SIPP contract with EPM to hold Abundance Debentures. Abundance is not a direct pension provider and cannot give pension advice.

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