Dangerous lack of Diversification in Share Portfolios

29 May 2013

The majority of UK households are failing to cash in on free market education and trading technology.

Dangerous lack of Diversification in Share Portfolios At Odds With Trading Technology on Tap

The vast majority of UK households are failing to cash in on free market education and trading technology with which to buy and sell shares.

Despite freely available, 24 hour access to easy to use trading tools, global market education, advice and opinion, which only a few years ago would have cost a pretty penny or two, nearly 6 million UK shareholders have three or fewer shareholdings with 2.25 million having just one.  Research from Equiniti, one of the UK’s leading providers of Corporate ISAs, employee share plans and share registration, shows that the average number of companies that the 9 million direct shareholders in the UK hold shares in is just 4.26.

Ironically, this chronic lack of diversification in the vast majority of client portfolios leaves the average UK shareholder more exposed to risk than the average spread better.

According to Equiniti, just 26% of individuals who directly hold shares in their own name do so in just one company. A further 23% hold shares in two companies and 12% hold shares in 3 companies, which means that almost two thirds of individuals hold shares in three or fewer companies. Further analysis by Equiniti Investment Services, which currently administers 22,625 employer sponsored ISAs showed that on average most individuals invested in an average of just 2-3 companies with an average portfolio value of slightly under £15,000.

This lack of diversification is frequently made all the riskier by the large amounts held in the smallest number of companies. The average value of shares held in one company is £3828, with share value decreasing as diversification gets greater – with an average share portfolio value of £945 invested in 9 companies.  Where shareholders invest in 10 or more companies the average value of shares is £3,786 – still lower however than that invested in just one company.

Mark Taylor, Managing Director of Investment Services at Equiniti says: “With superfast broadband and a smart phone in virtually every pocket, the average armchair investor has unprecedented decision making information and trading technology to hand. In the internet age, investors have never had such an opportunity to profit from readily available information.  However, our research suggests that most of us are either unaware of the risk of not diversifying within an investment portfolio, or are simply unwilling to engage.

“If the first law of property is location, the first rule of investment is diversification. For those with significant shareholdings the benefits of balancing their portfolios should be considered.  Single stock shareholders should be very mindful of the risk of entrusting their nest eggs to the fortunes of just one company, while those with Corporate ISAs must not confuse their employers with financial advisers”.