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One of the key benefits of a Stocks and Shares ISA is the wide selection of investment options that it allows. From gold and bonds to index funds and equities, investors can gain exposure to all elements of the global economy.
This is convenient from a diversification angle because different asset classes tend to move in different directions. When bonds go up, stocks often fall and when stocks fall, commodities often go up. This happens because investors tend to treat certain assets like safe havens during times of economic unrest.
By diversifying funds between asset classes, investors aim to reduce risk and improve growth opportunities. Some actively rebalance assets in a portfolio based on market movements – although this can be risky.
A mix of assets can add stability to a portfolio. It reduces the likelihood of losses from poor performance in any individual asset class. For beginners with a passive investment approach, diversification helps to protect against losses in a market downturn.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
An ISA asset balance strategy
Consider the following asset classes and how they can add diversity to an ISA.
Index tracker funds
These provide exposure to all the stocks in an entire index like the FTSE 100, S&P 500, or MSCI World. This is an easy way to gain exposure to a range of companies across different sectors and geographies.
Government bonds
Allocating some of an ISA to government bonds can help balance out the volatility of equities. With fixed interest rates, bonds provide smaller but more reliable returns.
Commodity ETFs
Commodities like gold are often considered a hedge against inflation. They tend to hold their value when stocks slip. Investors can gain exposure in an ISA via commodity ETFs.
Stocks
When picking individual stocks, it’s good practice to add a few stocks from different industries and geographical regions to increase diversity. Beyond Europe and the US, emerging markets like Asia and Africa often have untapped opportunities.
Inspired diversity
Beginner investors looking for inspiration may want to consider Scottish Mortgage Investment Trust (LSE: SMT).
This popular Edinburgh-based investment trust aims to harness high-growth innovative companies across the globe. It focuses fairly heavily on US tech stocks like Nvidia, Tesla, and Shopify but also includes a decent amount of diversification. Its geographical reach includes Chinese companies like PDD Holdings, Meituan, and ByteDance, French luxury goods retailers Hermes and Kering, and in the UK, Ocado and Wise.
Around 65% of the portfolio focuses on the tech and consumer discretionary sectors, with 18% in industrials and the rest in healthcare, finance, and smaller industries. Notably, it has almost no investment in carbon-based energy, prioritising the transition to renewables.
Although the stock is up 36% over 12 months, it suffered harsh declines in the past. Currently, the price is 28% below its all-time high.
With an aggressive focus on growth, it’s heavily exposed to sensitive industries that can be volatile when the economy wobbles. That puts it at risk of extended periods of losses.
Over the past 30 years, it’s grown at an annualised rate of 11.37%.
Whether considering Scottish Mortgage as a stock pick or using its portfolio as a guideline, investors are likely to benefit from its diversified model. It’s a stock I plan to continue buying for years to come as part of my passive income retirement plan.
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