Summertime … and making a living ain't easy for investors

THE July start of the holiday season is, for many, the chance to escape from the seemingly endless budget cuts, austerity measures and general doom and gloom.

It is also an opportune time to review the first half of the year and how investors have fared.

The FTSE 100 index has fallen by about 9 per cent since the beginning of the year and US and Japanese markets are also marginally lower over the same period. A decent corporate bond fund has delivered growth of 5 per cent year to date with far less volatility than stock markets, while the price of gold has risen by about 9 per cent.

So even within a short time we have witnessed significant divergence in terms of returns from different assets. I believe that investors need to be aware of such divergence because it provides clear evidence that continual monitoring of portfolios is massively important. It also provides support for the argument that diversification within portfolios is essential. However, for any diversification to be meaningful and to add value, it needs to be well reasoned and pay heed to the prevailing dynamics of both the markets and the economy.

In other words, diversification based on a static model which suggests weightings in each of the four asset classes is likely to lead to underperformance. Just holding shares, property, fixed interest and cash is not terribly clever. I think we have now reached a point where it is impossible to accurately predict what happens next in markets. Indeed, there is indeed clear evidence that even the mighty hedge funds are significantly reducing their investments, as the future direction in trades becomes ever more opaque.

It appears to be dawning on many observers that any recovery in economies to date has been fuelled by quantitative easing and now that it has been withdrawn, it is difficult for the economy to continue making progress. On top of this, the UK government has clearly laid out its intention to significantly reduce the debt burden and hence it becomes inevitable that unemployment will increase and consumer spending should reduce over the coming years.

We are enduring a period in which almost nothing could come as a great surprise, but there are a couple of fundamental points that investors would do well to adhere to. First, avoid chasing growth. It is no bad thing to accept that there are periods during which making progress is almost impossible, but at the same time it is very easy to suffer substantial losses within a portfolio. Change for the sake of change is seldom smart.

Second, seek diversification within a portfolio. This might mean nothing cleverer than increasing a cash balance, or seeking exposure to good corporate bond funds or perhaps physical gold.

It is worth remembering that the real benchmark for any portfolio is to outperform cash and, therefore, it makes sense to seek to do this with as little volatility as possible.

• Ken Taylor is the managing director of Mackenzie Taylor Wealth Managementz