So now we have two accounts on the go, a stocks and shares ISA and a pension. By the way, a SIPP is just a pension with a few more bells and whistles. The two terms are not strictly interchangeable. A SIPP is a specific type of pension, not just another name for one.
We need now to decide what to put into those accounts, and there are some things to think about here. The first is your attitude to risk. Now if you’re a new investor, that phrase might be totally meaningless, and that’s fine!
To be honest, it’s an advice term. As an adviser I have to ascertain my clients’ attitude to risk so that I can recommend an investment to match. When it comes to investing, what we’re talking about is the risk of the money going down in value.
It’s important to note that fluctuating values is part and parcel of investing. You need to be prepared for potentially very big swings in the value of your investments over the short term, on the way towards hopefully getting good returns over the long term.
And that’s a key point, actually. The length of the term over which you are investing is a factor in the risk you should take. Longer term, higher risk, yet still subject to your overall attitude to risk.
Let’s measure that first. the best way is to download an iOS app called Beam, which will do a great job at measuring your attitude to risk. It’s worth noting that fairly soon the creators of Beam will be launching a web version accessible to all, which is exciting.
To put things very simply for now, the amount of risk you’re prepared to take is loosely correlated with the level of equities in your portfolio. So, if you take an attitude to risk test and come out as balanced, you might want to consider a balanced portfolio of 50% equities and 50% bonds and other stuff.
If you’re a more adventurous investor, you can dial up the equities. If you’re a more cautious investor, you can dial it back. I would also overlay on to that the term you’re investing over. If you’re a balanced investor but you’re investing over 30 years into a pension, you could consider dialling up the equities to maybe 70%.
Your attitude to risk is your starting point, then dial up or down the equities percentage based on the term. There is a matrix in the workbook which might help you to think through the split of assets. Given that your ISA is more likely to be accessed earlier, depending on your Life stage, then you would probably hold less equities in that account relative to your pension.
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