Bill Jamieson: Big questions for uncertain times

Published on 16/09/2012 00:00

WILL 2013 bring the long-awaited breakthrough for shares, or will bonds continue to offer better returns? Which sectors and overseas markets are likely to outperform?

And how should investors best position themselves for the period ahead? These are big questions for investors. What is the secret of success in today’s turbulent markets? Market professionals place emphasis in knowing the markets and funds in which you are planning to invest.

Now it’s certainly important that investors do their research. But the key to successful investment is knowing something closer to home: yourself. How much risk are you prepared to take? Is capital protection your priority? Or are you ready to take on extra risk by choosing gold-related funds or opting for ones that appear undervalued?

Of all the “secrets of investment success”, the most important is knowing yourself, what risk you are prepared to take and having a clear set of objectives.

One of the attractions of The Scotsman’s IFA competition is the importance attached to the overall financial position of the model couple. What likely expenses should be planned for? What are the objectives of long-term saving? And what is the couple’s attitude to risk?

The problem, of course, is that we can never be sure whether a high-risk investment will deliver outperformance, or whether a “cautious managed” fund could end up losing money. So one of the first foundations in a long-term portfolio is diversification. Whether it is a lump-sum investment or a regular amount being saved every month, an investment adviser will almost certainly recommend a spread of funds. The capital will typically be spread across funds specialising in corporate bonds, equity income funds, global funds offering prospects of growth in the world’s leading companies, and a specialist fund or funds providing the opportunity to make big capital gains if the fund choice proves shrewd.

The most popular funds in recent years have been those offering a good income from equity investment. Not only have these helped to provide a better income return than bank accounts, but in many cases the fund manager has invested in large blue-chip companies with a good track record of dividend payments. These are typically solid shares that have held up well in the past 18 months. But will defensive income funds be appropriate when the economy finally starts to recover? Might it be better to opt for high-growth companies that would stand to do well in an upturn?

Another important feature is the breadth of choice thrown up by geographic diversification. Such is the wide range of specialist funds on offer that the world is truly the investor’s oyster. IFAs spend time creating a diversified portfolio that matches the investor’s requirements. Markets in Europe present a big challenge. Some investment professionals argue that investors should still steer clear. Others argue that there is recovery potential.

Many investors are content to stick with their initial investment choices. But others like to see their capital actively managed. If a fund is not performing well, or there has been a change in the economic outlook for a particular sector, active investors will want to take swift action by switching. But you don’t want to do this too often as dealing costs can eat into any profits you make.

We will follow Victor and Jean’s progress with interest. Meantime, happy investing!