Spreading Risk Has Always Made Sense

Almost exactly 50 years ago, a company few people had previously heard of was hitting the headlines as the price of its shares went stratospheric. A few months later it came back to earth with a crash. Fortunes were made and lost after mining company Poseidon announced the discovery of new nickel ore reserves in Western Australia just as world nickel prices hit a new high.

Poseidon misadventure

Poseidon shares had been trading at A$0.80 in the second half of 1969 when they took off. The price climbed relentlessly for weeks as investors claimed their piece of the action. One day in February 1970, the shares touched A$280.00. Then the profit-taking began and the share price crashed. Nickel prices later dropped back and the Poseidon nickel ore was low quality; receivership ensued in 1974.

Fast-forward 20 years and a new ‘rising star’ of the stock market burned out. A minor fashion house called Polly Peck had been acquired by new owners in 1980 and used as a vehicle for ventures in Northern Cyprus. A series of deals in the 1980s brought such growth that the company’s shares entered the FTSE 100. In September 1990, Polly Peck shares were suspended amid fraud allegations.

FOMO frenzy – 300 years ago!

The loss suffered by many investors in Poseidon or Polly Peck was a painful lesson about impossible returns and concentration of risk. There had been plenty of previous warnings, right back to the South Sea Bubble in 1720, about blindly following the herd in a FOMO frenzy. Speculative investment has always had particular risk attached and that is all the greater if it is not diversified.

The value of diversifying your portfolio with collective investments

As a general principle, any investment in shares needs to be spread around, so that if one share price slumps badly it only affects a proportion of your overall portfolio. For many investors, a sound way to achieve a spread of risk is through collective investment schemes with risk profiles aligned to suit their needs. We can advise on the investment strategies and products most appropriate for your objectives and needs.

It is important to take professional advice before making any decision relating to your personal finances. Information within this newsletter is based on our current understanding of taxation and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.

The value of investments can go down as well as up and you may not get back the full amount you invested. The past is not a guide to future performance and past performance may not necessarily
be repeated. If you withdraw from an investment in the early years, you may not get back the full amount you invested. Changes in the rates of exchange may have an adverse effect on the value or price of an investment in sterling terms if it is denominated in a foreign currency. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.

The information contained within this newsletter is for information only purposes and does not constitute financial advice. The purpose of this newsletter is to provide technical and general guidance and should not be interpreted as a personal recommendation or advice.

The Financial Conduct Authority does not regulate advice on deposit accounts and some forms of tax advice.

In the News

Unclaimed pension pots top £19.4bn

Research1 has shown that because only 1 in 25 people consider telling their pension provider when they move home, around 1.6 million pension pots totalling £19.4bn – the equivalent of nearly £13,000 per pension pot – have gone unclaimed. Estimates from the government suggest that there will be as many as 50 million dormant and lost pensions by 2050. In 2017, over 375,000 attempts were made to contact customers, leading to £1bn in assets being reunited with them.

Temper your income expectations as dividend drought descends

The economic shock from COVID-19 has provided a blow to income investors, with 45% of UK companies cutting dividends this year and more expected to follow suit as the year progresses. Forecasts suggest over £52bn in company dividends are at risk in the UK this year2. The data highlights the biggest impacted sector is banks, while defensive dividends are more likely to be safe, such as food retail, healthcare, drink and tobacco, and basic consumer goods.

In addition, in May, the Treasury announced that companies borrowing over £50m through the Coronavirus Large Business Interruption Loan Scheme would be subject to restrictions, including a ban on dividend payments to shareholders, except where they were previously agreed, adding a further potential dampener on investors’ income expectations this year.

1ABI, 2020 2Link Assets, 2020