I was recently asked to comment on the new research report from the University of East Anglia proposing a new method designed to make ‘portfolio theory more practically valuable and user friendly’.  If you work within our profession the last sentence is likely to make sense.  However if you’re reading this and you don’t work within our business it’s likely to make relatively little sense at all.  I’m a great believer in trying to explain the techniques we use to help our clients in plain English, so let me try to help explain what this means with the help of a little story….

When I was 11 and 12, I used to have lunch at my Nans (my Mums Mum) house every weekday.  She lived 3 minutes walk from my school and was quite happy to cook lunch for me as opposed to me ‘wandering the streets getting into trouble’ (her words…not mine!).

My Nan was a typical east end matriarch….she wanted to look after everyone, ensured she knew what was going on in all of her childrens lives (and that wasn’t easy work seeing as she had 4 boys and 3 girls!).

She also made the best omelette in the world!  It always had a perfect taste, consistency and temperature and try as I might (and I have tried!) I have not anything that tasted better than my Nan’s omelettes.

One day whilst my Nan was in the kitchen I heard a crash and a scream.  My nan had dropped the eggs!  I ran out to the kitchen to find shell and yoke all over the kitchen floor.

“Are you okay?”  I said to my nan.

“I’m fine boy” said my Nan (she always called me boy, and I’m sure if she was alive today she still would!) “It’s just that you won’t be having an omelette today as i’ve smashed all the eggs!”

“I wished I would have put some in the egg holder in the fridge and kept some in the box” she continued “and then I would have some eggs left to make your omelette….you know what they say don’t you?”

“No Nan” I said “What do they say?”

“Don’t put all you eggs in one basket.”

At the time the phrase didn’t make sense to the 11 year old me.  I mean, we kept the eggs in an egg-box, so where does the basket come from?  Why would you have more than one basket to keep all your eggs?  Also, why would you keep your eggs in a basket?  You’re more than likely to smash more in a basket as they are jiggling around in there!  However, as now I’m the grand old age of 34, the phrase makes far more sense!

When we look after our clients investment and retirement portfolios, one of the most important jobs we do is to ensure that we have the right mixture of different types of assets (the baskets) and ensure that we have the right amount invested (the eggs) depending on a number of factors in each asset.  Assets in the world of financial planning are different investment into different areas, for example, Shares, Cash, Property, Bonds and Cash.

So, why do we do this?  About 60 years ago an American economist named Harry Markowitz conducted detailed research designed to build the most ‘efficient’ portfolios.  So, in simple terms, what does efficient mean?  ‘Efficient’ means ensuring that the mix of assets you have is performing as well as possible based on your attitude to risk.  This original research has been validated by a numerous amount of studies over the last few years, including the latest one by the University of East Anglia.

So, what does this mean for you?  and how do you ensure that your investment and pension portfolio is invested appropriately to make sure you have the right eggs and the right baskets?  A professional independent financial adviser should have an understanding of asset allocation and take the time to understand your attitude to risk sufficiently to help you build a portfolio to meet your needs.

Also, there are a number of online tools coming into the market which may also help in this area….and this is an interesting development in financial planning I’m going to be writing about later in this blog.