22 May 2025
Build a resilient, growth-oriented portfolio using smart, balanced strategies.
Saving for the Future: It’s Not Just About Picking an Account
When planning for future goals like retirement or a major purchase, tax-efficient ISAs and pensions offer valuable frameworks. But what truly drives long-term success isn’t just where you invest — it’s how your investments are structured.
That’s where diversification and correlation come in. By spreading your money across a variety of assets that don’t all move in the same direction, you can aim for steady returns while managing risk.
How Your Money Works: An Example with Gilts
Let’s take a straightforward example.
Imagine you invest in a 10-year gilt, a UK government bond. Essentially, you’re lending money to the government in exchange for regular interest payments, with the original amount repaid at the end of the term.
Why are gilts considered low risk?
- The UK government has a strong credit rating
- Gilts are liquid — they can be bought and sold easily
- They provide stability in volatile markets
Gilts are often included in portfolios for those seeking dependable returns, especially when approaching short-term financial goals or requiring accessible funds.
Matching Investments to Your Risk Profile
Your investment portfolio should reflect your comfort with risk and your time horizon:
- Lower-risk investors may hold more fixed-interest assets like gilts or corporate bonds.
- Higher-risk investors or those with longer horizons may include more equities, which represent shares in companies and offer greater growth potential — albeit with more volatility.
Dividends from equities can be reinvested or used to create income. Preference shares may offer fixed dividends, adding a layer of predictability.
Why Correlation Matters
We often hear, “Don’t put all your eggs in one basket.” But it’s not just about owning multiple assets — it’s about ensuring they don’t all behave the same way.
What is Correlation?
Correlation measures how investments move in relation to each other.
- +1 = Perfect positive correlation (they move together)
- 0 = No correlation
- -1 = Perfect negative correlation (they move in opposite directions)
Why it Matters
If all your investments rise and fall together, one market dip could hit your entire portfolio.
But if some rise when others fall, you reduce your overall risk.
Example:
Owning shares in both an umbrella company and a sunscreen brand — one thrives in rain, the other in sun. Together, they balance each other out, no matter the forecast.
Diversification Done Properly
True diversification goes beyond numbers. Holding five tech stocks isn’t diversified if they’re all in the same sector.
Aim to spread your investments across:
- Different industries (e.g. tech, healthcare, energy)
- Different asset types (e.g. equities, bonds, property, commodities)
- Different regions (e.g. UK, Europe, US, emerging markets)
Most investors should seek portfolios with average correlations below 0.7 to reduce risk.
| Correlation | Diversification Quality |
| -1 to 0.5 | Excellent |
| 0.5 to 0.7 | Good |
| 0.7 to 0.9 | Poor |
| 0.9 to 1.0 | None |
How to Check Your Portfolio’s Correlation
A portfolio can look diverse but still be highly correlated.
What to do:
- Ask your adviser for a correlation analysis
- Watch out for investments with correlation above 0.7
- Ensure each asset still supports your return objectives
Blending: The Art of Balanced Investing
Blending is about combining assets that perform differently in various market conditions. It’s not about chasing high returns — it’s about building a strategy that endures.
For example:
- Gilts and bonds offer stability
- Equities provide long-term growth
- Alternatives like property or commodities can offer further diversification
Final Thoughts: Ask Better Questions
Smart investing isn’t about volume — it’s about strategy.
Instead of just asking “What am I investing in?” ask:
“How do my investments work together?”
That’s the real key to building and protecting your wealth over time.
How Heathcote Financial Planning Can Help
At Heathcote Financial Planning, we help you structure your ISAs and pensions around your goals, preferences and timelines. Our advisers can:
- Assess your current portfolio for correlation and diversification
- Recommend tax-efficient strategies tailored to your risk profile
- Provide ongoing support as your circumstances evolve
📞 Book a free consultation – 0333 335 6087 or email us: info@heathcotefp.co.uk to discover how smart diversification and correlation could strengthen your long-term financial wellbeing.
Disclaimer
The information provided in this article is for educational purposes only and does not constitute financial advice. Investments can go down as well as up, and you may not get back the full amount invested. Past performance is not a reliable indicator of future results. Tax treatment depends on your individual circumstances and may change in the future. Please speak to a qualified financial adviser before making any investment decisions.
Company registration
Heathcote Financial Planning is a trading style of The Mortgage and Protection Partnership Ltd, authorised and regulated by the Financial Conduct Authority (No: 612049).
Registered address: Olympus House, Olympus Park, Quedgeley GL2 4NF.
Company No: 08734287.