Last week saw the FTSE 100 fall 13%, marking one of the index’s worst week’s performances in its history.

Other markets, including FTSE AIM, European and US markets, all performed similarly.

The reason for the fall – growing fears over the spread of Coronavirus – was something that could not have been planned for.

Although this fall may be temporary, it nonetheless demonstrates the potential volatility that investing in stocks and shares can expose an investor to.

In so doing, it has also demonstrated the potential value in diversifying a portfolio to include options which are not correlated to global equity performance.

Peer to Peer (P2P) and debt-based securities (DBS) are two such options. These can be held in IF ISAs, allowing for the same generous tax perks as a Stocks and Shares ISA, but generally come with a fixed return – usually above inflation.

These returns do come with some capital and liquidity risks, however there are also risks when investing in stocks and shares.

The fixed returns mean these asset classes do not have the potential to spike in value, as happened with Tesla shares in January, but it also means they are not affected by market sentiment in the same way as a stock market. They therefore offer real protection  when something negatively affects the stock market, as happened last week. 

Real diversification? 

In its regulatory update on P2P last year, the FCA introduced the concept of the ‘restricted investor’ to P2P – for those not receiving financial advice or considered high net worth or sophisticated. Restricted investors would only be allowed to invest 10% of their assets in P2P. 

This was followed at the end of the year by a temporary market intervention, effectively closing off the majority of DBS for non high net worth or sophisticated investors.  

The FCA was clearly trying to protect consumers who might not understand the risks involved in investing in an IF ISA product, including the potential to lose capital, and who might be lured in by the attractive returns offered.

Of course, the risk of capital loss and of a lack of awareness of the potential downsides is not limited to P2P. The losses suffered by so many retail consumers investing in ‘star stock picker’ Neil Woodfords various funds is evidence of that. Shows such as Panorama interviewed various Woodford investors, and many clearly did not understand the risks involved before investing. But that doesn’t mean that all equity investing is inherently bad.

So, instead of some kind of penalty, the 10% P2P restriction could be viewed as a reasonable portion of an individual’s portfolio to diversify away from the volatility found in equities. 

Looking at the current situation as an example, with Coronavirus still spreading globally, it is hard to predict whether there will be an imminent recovery, the falls will continue for a while longer, or if prices will level off. Investing some capital into a P2P or DBS platform would leave that money outside the erratic ups and downs of the stock markets , but still earning predictable, above inflation returns.

This won’t fit the profile for all investors, however for IFAs looking to provide their clients with options, this could provide another string to their bow.