Investors putting eggs in one stock market basket

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Research by Lloyds TSB International suggests that wealthy investors may be subjected to significant risk by excessive exposure to the stock market

Diversification is the cornerstone of a solid investment portfolio

•    Research shows neglect for asset classes not linked to the UK and the stock market

  •     More than twice as much time spent picking individual stocks than selecting asset classes
  •     Only six per cent of wealthy investors hold natural resources, only five per cent hold precious metals
  •     Thirty-one per cent of wealthy investors admit their investments are ‘not well-diversified’
  •     Insufficient non UK focus: only six per cent hold foreign currency and the UK is overwhelmingly regarded as most attractive market for investments

Market research by Lloyds TSB International Wealth suggests many wealthy investors are heavily exposed to the UK stock market and would benefit from diversifying their investments.

The survey of people with over £250,000 of savings and investments shows that 80 percent hold stocks and shares while only six per cent have investments in natural resources, five percent hold precious metals and six per cent hold foreign currency. Only 17 percent of the 923 respondents hold government bonds.

While the prospect of high inflation might explain a dearth of interest in government bonds, it does give reason for greater exposure to commodities, a key driver of inflation and an asset class that generally moves counter-cyclically to the stock market.

Investors’ narrow focus on equities is further underlined by their tendency to spend more time picking stocks than selecting asset classes to invest in. Only six percent spend more than half the time they dedicate to investment decisions choosing asset classes, compared to 13 percent who spend this much time selecting specific stocks and shares.

Thirty-one percent of wealthy investors admit their investments are ‘not well-diversified’.

“Diversification is the cornerstone of a solid investment portfolio,” said Nicholas Boys Smith, managing director of Lloyds TSB International Wealth. “Even high-conviction investors with a track-record of good returns should spread their risk by considering asset classes that aren’t linked to the UK or investments that aren’t linked to the stock market like corporate or government bonds or commodities.

“Investors are spending twice as much time stock picking as they selecting asset classes. This is precisely the wrong way round. After the stock market bull run in 2009 and part of 2010, picking good stocks became more important for some investors as growth prospects diminished for the FTSE100 as a whole. But stock-selection should still be seen by investors as the icing on the investment cake, not the cake itself. The key consideration is which asset classes to invest in.”

The most common reason for people’s lack of diversification is that they are unsure about where to invest (31 percent of those who realise their investments are too concentrated). The second most popular reason is that they think one or two asset classes are going to outperform the rest (17 percent) and the third most common reason is that they think diversification will be expensive (14 percent).

“If people are unsure about how to diversify effectively they should take advice – advice that need not be expensive at all. Recognition that there are many things outside your control and many things that you simply cannot know is the first step to creating a better diversified lower-risk investment portfolio.”

The survey shows that many investors are not diversifying their investments beyond the UK with only six percent investing in foreign currency. Forty one percent regard the UK as the most attractive financial market from an investment perspective.

But there is an understanding of the returns available elsewhere. Sixty-three percent of wealthy investors earmark China as a market with high potential returns – a more common choice than any other market, with only 11 per cent selecting the UK and a meagre 6 percent choosing the Eurozone.

People do note risks in China, saying that investing there is riskier than the UK, but over all they think that China is the second most attractive place to invest (28 per cent said this market was one of the most attractive to them from an investment perspective), behind only the UK (41 per cent) and a large distance ahead of western economies like the Eurozone (13 percent) and US (15 percent).

Notes to editors:
All figures, unless otherwise stated, are from a YouGov survey that was commissioned by Lloyds TSB International Wealth. 923 UK adults with savings and investments of at least £250,000 were surveyed online, 16 – 21 February 2011. The responding sample is weighted to the accepted profile of this group of people to provide a representative reporting sample.

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George Morrison
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