Investment planning – back to basics


Bill Blevins is Managing Director of Blevins Franks. He has specialised in expatriate investment and tax planning for over 35 years. He has written books and gives lectures on this subject in Southern Europe and the UK

Spring is in the air. After the flow of discouraging economic and market news through the winter, the outlook now appears to be sunnier. There is increasing optimism that the global economic downturn may be bottoming out and that we could see a return to growth sooner than expected. Investor, business and consumer sentiment has risen.

The growing confidence among investors resulted in stockmarkets posting positive results in April and May (as at the time of writing on May 29). At the end of April, respected fund manager, Anthony Bolton, declared that “all things are in place for the bear market to have ended”.  He anticipates the rally to last several years and is also bullish on high yield bonds.

On May 11, the Financial Times reported that total returns in the European and US high yield bond markets had risen almost 20 per cent since the start of the year, making the sector the best performing assets.  As Jim Reid, strategist at Deutsche Bank, told the FT, this “is a good sign as the outperformance tells us that investors are no longer expecting the global economy to collapse into depression”.  

Many investors who have been sitting on cash, too nervous to invest amid the volatility and uncertainty, are now beginning to wonder if it is time to step back into the market.  Only hindsight will tell us when the market bottomed.  It is possible that markets won’t fall back under their March lows, but if the economic news turns worse, it may derail the market recovery for a while. Even if markets have passed the bottom, we will continue to see ups and downs for a while.

This is a good time to go over some investment basics.

Time not timing

Most investors who switch in and out of the markets on good and bad news are worse off as a result. It’s time in the markets, not trying to time the markets, that achieve the best results. It is usually impossible to predict when markets will suddenly rise or fall. Looking at this year, the best time to have invested in equities was at the beginning of March, but would you have predicted it among all the negative news at the time?  Missing just a few of the best days in an economic cycle can significantly reduce your returns. Provided you are invested for the longer-term, it doesn’t necessarily matter if the markets have hit the bottom yet or not. If you are leaving your money invested, a short-term paper loss is not the end of the world.  

Establish your objectives

Your investment strategy should be structured around your personal objectives, and not reports of market gains. If you’ll need to access your capital in the short-term, you should advisably leave it in cash – there are too many short term risks with equities and bonds. However, if you are retired and need to protect your money from inflation you should be a long-term investor and portfolio designed around your life expectancy rather than current events. You need to invest in real assets (equities, bonds, property) because cash doesn’t provide the protection you need. If you require your capital to provide income, a bond fund is often a good option because you receive regular income without eating into the capital. High yield bond funds are currently paying very attractive income and this is a rare opportunity to lock in such a high yield (even while capital values are still poor).

Diversify and then diversify some more

It is recommended that you spread your capital out over a few different asset classes, allowing you to benefit from the best assets while reducing your exposure to the worst.  A portfolio should normally be first of all diversified across asset classes and then some of the assets classes diversified across sectors, countries, companies etc.  You could also diversify some funds across managers with multi manager funds.

Poor economic news does not have to prevent markets rising

We are likely to see more bad economic news – while this may impact on market performance it will not necessarily prevent a bull run – historically markets recover before the economy does.  Bull markets usually start when things look bleak and often keep going even though they get bleaker for several months.  

Bull runs always follow bear markets

Being exposed to equities now ensures you will capture the upswing – and the upswing can be quite powerful.  According to Global Financial Data, based on the S&P index, the last five bull markets lasted an average 68 months and produced an average return of 188 per cent.    

Pound cost averaging

If you think that this would be a good time to invest but still feel too nervous to do so, you could ‘drip feed’ your capital into the markets (whether equities or bonds or both). While you would miss out on some gains if the market keeps rising, you won’t have missed out on all of them and if asset prices fall again you would have reduced your potential loss. You could make a start now by setting up a structure like an investment bond and using it to move money around slowly until fully invested. These bonds can provide attractive tax mitigation opportunities which start immediately.  Advice from an experienced financial professional like Blevins Franks will be invaluable in establishing the most appropriate investment strategy for you.