Portfolio Diversification is the Best Way to Benefit from Market Volatility

7th September 2022 - Property Notify

Powering the housing market for over a decade, low-interest rates have perhaps until now, made buy-to-let an attractive investment option.

Although bricks and mortar still have the beneficence of being a good investment and an impending property crash seems unlikely, the cost-of-living crisis and rising interest rates have led to speculation among experts that the boom could soon be over.

Although the value of larger properties is still outpacing and propping up the bottom of the market, with inflation at a new high of 9.1% and at its highest level in 40 years, the economic influences determining the future are forecasting a shift in supply and investment potential.

Fuelled by increasing energy costs and record petrol prices, further inflation rate rises are expected throughout 2022 with the power to slow momentum.

Moreover, as house price to earnings ratios are close to record highs amid rising inflation and geopolitical uncertainty, speculation is rife that the cost of debt will discourage borrowing and slow consumer demand.

Since the first buy-to-let mortgage products officially launched in 1996, there are now over 2.65 million investors in the private landlord sector.

Although bricks and mortar can be leveraged to improve returns, portfolio diversification is the best way to benefit from market volatility and historically, equities have far outperformed property.

Property Versus Equities

Given that tax efficiency and investment returns are arguably the key dynamics driving all investors, it’s worth considering complementing and diversifying existing buy-to-let portfolios with equities.

As such, investing in both will limit exposure and proffer up the potential to earn capital appreciation and rental income.

Unlike property which takes time and effort to manage, stocks and shares are liquid assets that can be sold quickly to release cash.

Building wealth over time, investing in equities can generate a regular income, shareholder benefits, capital growth and cash rewards in the form of dividends.

However, when it comes to property versus equities and figuring out which will produce the greatest long-term returns, both are passive sources of income presenting their own set of risks.

EIS and SEIS: UK Investor Staples

Since their launch, the Enterprise Investment Scheme (EIS) and latterly the Seed Enterprise Investment Scheme (SEIS) have both become tried and tested UK investor staples.

As a part of the government’s venture capital schemes, qualifying companies in a wide range of sectors and industries are raising money to support their growth.

The two schemes are similar with notable differences.

Whilst SEIS is focused on very early-stage companies, EIS focuses on small and medium-sized businesses.

Both schemes encourage investment in small unquoted, government-qualified companies within the United Kingdom.

Moreover, both schemes provide a series of significant and seriously attractive tax reliefs to UK investors.

EIS Tax Advantages Include:

• Upfront 30% income tax relief.

• Offsetting tax relief against your previous year’s tax bill.

• No Capital Gains Tax (CGT) on any gains when the investment is realised after three years.

• CGT deferral: you can defer capital gains realised on a different asset.

• Loss relief.

• Free from Inheritance Tax (IHT): EIS shares do not form part of the estate for IHT purposes.

SEIS Tax Advantages Include:

• Up to 50% income tax relief on investments up to £100,000 per tax year.

• If the shares are disposed of at a loss, you can set this against income tax for that year or the previous year.

• Any gain is Capital Gains Tax (CGT) free if the investment is held for at least three years.

• 50% of Capital Gains are exempt from CGT when re-invested in a SEIS-qualifying company.

Balanced, Tax Efficient Investing Strategies

Investing in EIS and SEIS can limit exposure and alongside buy-to-let, forms part of a well-balanced investment portfolio. whilst complementing your existing portfolio with equities designed to withstand market ebbs and flows, alongside those with tax advantages.

Investment Synergy - Diversification is the watch word in all areas of life ..... a balanced portfolio is even more effective if it includes ethical opportunities that include sustainability and the environment.