Are You Diversified?

Updated: Feb 12, 2021

(My guess is you probably aren’t.)

Portfolio diversification is drummed in to us pretty early as investors, and rightly so — it is a leading contributor to avoiding losses and preventing damage to your wealth. I distinctly remember being told as a child ‘never to put all your eggs in one basket’, but actually, come to think of it, even those with the most diversified, multi-asset portfolios may not be as diversified as they think.

Real diversification is sometimes difficult to anticipate — something that investors in Woodford Funds wish they had foreseen. Some investors in the now disgraced fund may have spread their assets across Woodford’s various equity funds. If you had your money in both the ‘flagship’ Woodford Equity Income fund and the Woodford Patient Capital fund, you may have quipped that you actually held stocks in over 200 companies, with global footprints and industry coverage from early stage biotechs to British house builders. Well, the problem wouldn’t have lied in the underlying holdings — the problem was Neil Woodford himself! You would have eventually seen your money gated within the fund, preventing you from selling out. You would then receive a sequential set of payments as the fund administrator wound down the fund and sold off all the holdings at rock bottom prices.

This is a lesson to us all that diversification needs to happen at each level in our investments, from the underlying holdings to the investment manager and lastly, to which I have been more aware of recently, the platform to which you own your investments in.

If I were to ask you to view your investment brokerage platform as a basket — please ask yourself the question, are all your eggs in it? If, like the majority of investors in the UK, you have a single platform to which you hold your investments or cash, it may be time for a rethink. See, there are many pitfalls to building your portfolio and putting all your eggs with one platform provider, I will list a few below.

What happens if the platform I invest with goes bust?

It’s really not what you want. Investments in shares, funds and bonds are in fact owned by you upon purchase of these assets, but unlike the old days where you held paper certificates, investments are now held in pooled nominee accounts on behalf of a number of investments on the platform. You would likely be able to prove ownership in the event, but it would take a long time to receive payouts and you would have to wait for the dust to settle. This would prevent you from being able to trade with that cash tied up, and I’m sure it would cause you some worries until it is repaid to you.

Cash held in platform accounts on the other hand is a tricky one. Whilst the FCA assure you up to £85,000, if you held cash over that amount, there is no guarantee you will receive it back. Again, if the provider went under, it would take time to get your money back.

The Technical Glitch Issue

A more frequent occurrence in recent times has been the shutdown of investment platforms — usually due to a spike in levels of trading activity in volatile periods. In November 2020, the largest British platform Hargreaves Lansdown had widespread outages as they prevented customers from trading on one of the most volatile days in the markets yet. Whilst this wasn’t a crisis situation, you can imagine the pain of having your investment platform go down in a market crash and not having control over whether you can buy or sell.

Fee Hiking

If you only trade with one provider you could also be significantly exposing yourself to fee hiking. If you have a very large portfolio all on one platform, it becomes very cumbersome to switch should fees become too high for your liking.

By running your investment holdings across a few different trusted platforms, you stand a better chance of being truly diversified, and avoiding the pitfalls of putting all your eggs in one basket.

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