What should a good investment portfolio look like in 2021?

If you’re one of the people lucky enough to have spare cash to hand after the economic downturn prompted by the coronavirus pandemic, you’ll likely have wondered where to invest it for the best returns. Right now, with continued uncertainty in the markets and around global governments’ recovery strategies, that’s not always an easy question to answer.

Typically, investors look to several tried and tested asset classes: stocks, bonds, real estate, and cash. Now, there’s another, in the emerging crypto-asset sector. What role should crypto, and these other asset classes, play in your investment portfolio?

Drop the debt

Before you decide where to invest your hard-earned cash, it’s often worth paying down debt. There are two reasons for this. Firstly, interest rates on debt are generally higher than the returns you’ll get on most investments – especially in the case of expensive loans like credit card debt – meaning getting rid of debt can be one of the best investments out there.

Secondly, you never know what the future will hold. If you lose your job, or the rates on your debt rise for one reason or another, you may struggle to meet repayments. There’s a lot to be said for being debt-free and avoiding that worst-case scenario.

Assuming you’ve taken care of your debt or are confident you can manage it, where can you put your money for the best returns?

Balancing your portfolio

Most financial advisers agree that diversification is a good thing: putting all your eggs in one basket can invite disaster. But what proportion of your money should you allocate to different investments? That will depend on a number of factors, including your risk tolerance, the returns you are targeting, and your timeframe. Someone who plans to retire in five years and has already built a sizable portfolio will have different priorities to someone just starting out in their twenties. In the former case, they will likely want to preserve their wealth with safer, more stable investments; in the latter case, more aggressive growth may be the order of the day.

There are several major asset classes you may want to consider, allocating a proportion of your portfolio to some or all of them.

1. Cash. With interest rates so low, cash is not a good investment. In fact, you can easily lose money on the cash element of your portfolio because inflation eats away at its value over time. But it’s worth having some liquid cash around for a rainy day – either to pay for living expenses or emergencies, or to take advantage of dips in other markets, when bargains are available.
2. Bonds. Most retail investors don’t pay too much attention to bonds, since they can be complex to understand and so have generally been the preserve of experienced or institutional investors. Still, it’s worth exploring the bond market. Bonds come in different forms, including corporate and government bonds, but in both cases you’re effectively lending money to the issuer and receiving a regular payment in return. Historically, government bonds have returned 5-6%, though this fluctuates from year to year. Yields on most bonds are not currently attractive compared to other asset classes like stocks, but they can be a safe way to generate modest income – though the safer they are, the lower the yield. 
3. Stocks. Shares in large companies (those that make up the FTSE100 or S&P500, for example) make up a large proportion of many investors’ portfolios. Stocks are higher risk than cash or bonds, meaning they are more volatile but returns are typically higher over the long term (around 8-10% for the major indexes). Some stocks pay regular dividends, while others focus on capital growth. Most financial advisers recommend that you only invest in stocks if you plan to hold for at least five and ideally ten or more years, otherwise you could lose money if you have to sell in a downturn.
4. Property. Whether it’s the house you live in, a second property for rental, a stake in a commercial property fund or land, this has generally proven to be a strong investment class – though it’s not immune to a recession, as the world found out in 2008. Rental yields vary, of course, but figures suggest a long-term return of 9-10% per year for commercial property in the US.
5. Cryptocurrency. Bitcoin has a reputation as a high-risk asset due to its volatility. Bear markets can see a fall of 85% from the prior peak, and even in a strong bull market, 30-40% corrections are historically common. But bitcoin has, over its 12-year history, proven to be a robust and attractive asset, appreciating an average 230% every year in the last decade – 20 times the average stock market return. 2020’s crisis sparked huge institutional interest, as corporations and hedge funds recognised the value of as asset of fixed supply at a time when governments were printing money as never before.

It’s fair to say that bitcoin, or ‘digital gold’, is here to stay – and that we’re still relatively early on in the adoption cycle, with more corporations and institutions investing every week. For the average retail investor, bitcoin can produce impressive returns and a relatively small allocation in your portfolio can have an outsized effect – but you must be prepared to ride out the volatility. Additionally, there are many cryptocurrencies besides bitcoin that do not have the same track record and institutional interest, and these are more volatile still, carrying the risk that the investor will lose all their money.

Portfolio allocations

As mentioned above, diversification is key to creating a balanced portfolio that will meet your financial objectives. Most people won’t want to actively trade their portfolios, but will simply buy and hold, or make occasional changes as the markets and their objectives change.

There is no one-size-fits-all approach to investing, but learning about the different asset classes available, and their relative risks and returns, can equip you to make the best possible decisions about your financial future.