FOOL'S EYE VIEW
A Little Bit Of Monica In Your Portfolio

By Jane Mack (TMFJane)
October 9, 2003

Remember that classic moment in the television series of The Royle Family when those infamous creatures known as 'Jim' and 'Twiggy' were jigging about to hit song, Mambo No 5, while stripping wallpaper in Jim's dining room?

Even if you didn't watch the series, or their wiggling bottoms in that particular episode, you may remember how the song goes! It's the sort of tune that forces you to respond in some way - even if it's just a bit of tentative foot tapping. (I dare you not to recognise the words of the chorus...)

A little bit of Monica in my life, A little bit of Erica by my side, A little bit of Rita's all I need, A little bit of Tina's what I seek, A little bit of Sandra in the sun, A little bit of Mary all night long, A little bit of Jessica, here I am...

It's a great dance number and, while I wouldn't advocate anyone having so many available 'assets' in their day-to-day personal life, it's exactly what you ought to consider having in your long-term portfolio. A little bit of everything.

Many people think of the dictionary definition of a 'portfolio': a folder containing bits of paper that acknowledge the ownership of shares in companies. But it's so much more than that. A portfolio is really the folder that contains all the details of your financial future. And it shouldn't just consist of the few shares that you may own: it should contain details of every asset you possess. What's more, those assets should be fairly diverse.

Too many people have been burned by putting all their eggs in one basket, so if you spread your collective investments and assets around a bit, when one goes pear-shaped, there'll be enough left to see you through the storm.

So, what sort of assets could you put into your portfolio? And how do you choose the spread of your investments so that if one of them goes wrong, the rest would see you through a crisis? It's a difficult question, but a good starting point is to gauge your attitude to risk when considering your four main options:

Cash

Keeping your money in cash is, in theory, the safest way to save. In practice, it's less safe than you think. Over the long term, the real value of cash is eroded by inflation, which is why it's important always to seek the best possible interest rate on your cash savings. But, despite periods of high interest rates, cash has produced an average annual real return (that's after inflation) of 1.75% between 1869 and 2002.

Bonds

Bonds are the next-safest investment, particularly those issued by the government (known as gilts). Your money is lent to the government or to a company, which promises to pay it back to you by a certain date. During this time, you receive interest, usually annually. If you want to protect the value of your capital, you can buy index-linked products (whose returns are guaranteed to outpace inflation), but you might earn a lower interest rate. Again, the long-term yields on bonds are quite low: at 1.77%, they're about the same as cash.

Property

Since around seven out of ten people in the UK are homeowners, this is clearly a popular option. However, your house is also your home, so you might not regard it as an investment as such. Nevertheless, if you decide to trade down and release some of your equity, then you've made some sort of return on your investment. As people tend to feel 'safer' with bricks and mortar, buying property to rent out has become increasingly popular. When house prices go up, so does the value of your investment. But woe betide you if prices fall!

It's pretty hard to work out long-term returns on domestic property, as the data doesn't go back very far. But, according to this article, house prices rose by an average of 8.9% a year from 1973 to 2002. Take off inflation of around 6.5% a year over the last thirty years, and you arrive at a real return of somewhere around 2.4% over this period. 

Shares

Historically, shares have produced the best long-terms returns – 6.16% after inflation, at the last count. If you choose the right shares, you'll get long-term capital growth as well as dividends. The easiest way to do that is to invest in a cheap and cheerful index tracker.

Generally, the younger you are, the greater the proportion of your wealth you can invest in shares, because you have plenty of time to ride out the stock-market blips. However, as you move towards retirement, your portfolio should gradually contain more cash and bonds. And, whatever you invest in, remember the taxman! You can wrap all these investments, apart from property, in an ISA to protect your profits from the Inland Revenue.

More: Learn To Invest | You Choose: Cash, Bond Or Share ISA | ISA Centre.