With markets about as unpredictable as the weather, regular attention is advisable, writes Conal Gregory
Just like a garden, investments need to be planned, nurtured, pruned and regularly assessed. Far too many people keep popping money into the same vehicle without looking at the alternatives or considering whether their original idea still holds true.
If you have neither the time nor expertise, here is a clear case to bring in a professional. An independent financial adviser can look at personal holdings, discuss risks and objectives, and can recommend appropriate courses.
It’s vital to set up parameters in order that a warning system informs when an investment strays outside pre-set limits. It may be a cathartic approach that has never before been considered. One investor opts for 10 per cent and automatically sells when a holding rises or falls outside this level, ensuring that he is not over-greedy and into the speculative zone or liable to sustain too great a loss.
Start by noting all investments, when they commenced and their performance over the last, say, five years, adjusting for any dividends. Look at liabilities including a mortgage and any car loan. Consider how retirement planning is going and if there is adequate protection insurance in place, such as for critical illness and income cover.
Review this information, ensuring you know where investments are actually placed. This means not only any funds or shares held in an Individual Savings Account (ISA) but also a pension. It may reveal, for instance, over-exposure to the UK with insufficient growth potential from emerging markets.
There can be some popular misconceptions. The top 100 listed companies on the London Stock Exchange have only 19 per cent sales exposure to the UK. The majority therefore are trading internationally, which accounts for the stunning 14.4 per cent rise last year. A composite holding (as with an index fund) makes a good core holding although many would prefer the wider FTSE All-Share.
Think seriously about the level of risk you can accept and the time period available to invest. If you are comfortable with occasional short-term losses and looking long-term, then an “aggressive growth” portfolio would be appropriate. Volatility would be ironed out over the decades.
This is why a higher risk rating is apt for children’s savings, like a Junior ISA. When money has 15 plus years to work, it makes no sense to place it in a deposit account, probably receiving a derisory rate of interest that falls below inflation which effectively devalues its value.
For a high growth portfolio, opt for 20-25 per cent emerging markets, 10 per cent each in UK and US, 10 per cent in AIM or smaller companies, 10 per cent specialist either by country (such as India) or sector (such as technology), 20 per cent in continental Europe and the balance in equity income.
However, if coming up to retirement, a “cautious” portfolio should be achieved which concentrates on areas such as utilities and provides more income than growth. Here, funds that specialise in equity income and fixed income should compose 50-60 per cent, topped up with 10-15 per cent “absolute return” (which try to show some growth whatever the stock markets are doing) and the balance split between Europe, UK and US equities.
Increasingly funds are being risk-rated, often on a one to ten scale with one being the lowest. Combined with a matching methodology to assess risk tolerance, it is a good way to create a personal portfolio.
Yet markets never stay still and so the collectives chosen need to be reviewed regularly to check that they are performing as intended and that a balance has been retained. Periodically investment trusts, for instance, with their independent boards of directors (unlike unit trusts) decide to change their mandate.
Another approach is to go for a risk-targeted fund where managers monitor holdings daily and adjust the asset class mix. The former relies on past performance; the latter adjusts for market conditions.
As the US Federal Reserve continues to reduce its money creation programme, fresh opportunities arise for the canny investor. Now is a great time to plan and invest.