Two of the most common questions asked by investors are: “when should I invest?” and “where should I invest?”
With regards to the first question, while market volatility can provide opportunities that those with capital to invest can take advantage of, we generally recommend ‘time in the markets’ over ‘timing the markets’. Trying to time the market has plenty of risks, particularly the risk of missing out.
Then there is the temptation to try to predict which assets or shares will perform best. Again, this is fraught with risk, especially if you put too much of your investment capital into ‘one basket’. There are just too many unexpected situations that can crop up, geopolitically, economically, within a particular company etc, which can impact market and asset prices – sometimes negatively, sometimes positively.
To give one example, at the end of last year a leading investment bank recommended six “top trades” for 2016 to their clients. Just a few weeks into 2016, five of them had gone wrong. It was not the only investment bank to make predictions that soon proved to be ill-advised.
When buying funds, you want to make sure that the investment manager bases their choices on thorough and objective research. The choices should not be biased in any way as to their recommendations or the assets they purchase within the fund.
What about which assets you should invest in for 2016? If you look at a table of the top-performing asset classes over a number of years, what is clear is the lack of consistent asset class performance.
I have a table produced by Russell Investments that lists the top 12 performing assets from 2004 to 2014. Here are some examples from that table.
The only asset to be top three times was global emerging market equity, in 2005, 2009 and 2010. But it fell to bottom of the table in 2011, and was also bottom in 2008, 11th in 2013 and 10th in 2014.
North America equity was bottom in 2004, top in 2013, and ranged from fourth to 11th in between. UK All Companies was never top or bottom over the period, with a highest place of second in 2013 and lowest of 10th in 2008.
Moving away from equities, Sterling high-yield bonds went from fifth in 2004, to 11th, to sixth, to ninth, to eighth, to third, to seventh, to fifth before being the best performer in 2012. UK gilts were top in 2008 and 2011, but in the bottom three for six years.
Cash is included in the list. It was the second best performing asset in 2008, but in the bottom three six times over the period.
In times when we are seeing too much market volatility, investors are uncertain where to place their capital. However, with such inconstancy of asset class performance, it is risky to try to predict which specific assets will perform best.
Rather, you need to reduce risk by having a balanced and diversified spread of assets within your portfolio. We generally recommend three levels of diversification:
1) Asset allocation – the mix of equities, bonds, real assets, cash etc you hold in your portfolio.
2) Diversification among countries, companies, sectors etc.
3) Multi manager – no investment organisation excels in the management of all asset classes. To take maximum advantage of the expertise of the world’s best investment managers, the key to success is a thorough, critical analysis of funds and fund managers in order to select the best managers for each area of investment.
However, the first step before you do this is to understand your risk profile. Obtain a clear and objective assessment of your personal appetite for risk – for example, through psychometric analysis. You can then establish a portfolio strategy that is suitable for you.
If you have capital to invest but are wary about committing all of it now because you are unsure what markets are going to do next, ask your adviser about the ‘pounds cost averaging’ approach (it can be in Euros too of course). This phased approach to investing reduces risk while allowing you to have some funds invested when markets rise.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor. The value of investments can fall as well as rise, as can the income arising from them. Past performance should not be seen as an indication of future performance.
By Gavin Scott
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Gavin Scott, Senior Partner of Blevins Franks, has been advising expatriates on all aspects of their financial planning for more than 20 years. He has represented Blevins Franks in the Algarve since 2000. Gavin holds the Diploma for Financial Advisers. | www.blevinsfranks.com