Portfolio management

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5. Diversification: Safe custody

It is a sad fact of life that banks and brokers occasionally go out of business, taking their clients' assets with them. If it happens because of fraud, you may never get your money back. This is the first risk you need to guard against when you are building a portfolio.

You do not need to worry too much if you start with less than £48,000. The Financial Services Authority runs the Financial Services Compensation Scheme, which effectively insures your losses up to that limit, provided your money is invested with a regulated institution. This will cover you in all except a handful of cases.

But if your broker, bank or building society does collapse, it could still cause you serious inconvenience or loss. The scheme might take months or years to repay you. You would have to forego any gains you might have made in the meantime. So, it is worth taking the following preventive measures:

• Do not place more than £30,000 or so with any one institution
• Remember - the bigger the institution, the less likely the authorities are to let it fail in a crisis. Barings was allowed to go bust, but the likes of Barclays or the Halifax would not be. You are safer with such big names than with tiddlers
• Use brokers which cover you via their own insurance schemes, in addition to FSCS
• If you have PEPs or ISAs, do not place them with the same broker you use for your general sharedealing
• Keep your current and cash deposit accounts at a different bank or building society from the one(s) where your brokers deposit money belonging to their clients
• In general, do not go in for financial 'one-stop shopping' just for the sake of convenience

1. First things first 2. Should you invest before paying off your mortgage? 3. Do you want growth or income? 4. Diversification: summary 5. Diversification: Safe custody 6. Diversification: asset allocation 7. Diversification: shares 8. Diversification: sectors 9. Diversification: countries 10. Balancing your portfolio 11. What should you hold where? 12. Tips for married couples 13. Lump sum or drip feed? 14. The role of cash 15. Rebalancing your portfolio 16. What to do with dividends 17. All about bonds 18. What to do if you inherit a portfolio 19. Benchmarking performance 20. Setting up a portfolio spreadsheet 21. Conclusion

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