With volatile markets and geopolitical instability likely to remain in the coming months and years, and with inflation rising at a pace, our clients are increasingly questioning their investment strategy. Over the past 12 months a cautious strategy has yielded negative returns, while paradoxically a gung-ho 100% equities approach has provided positive ones. The reason for this is that rising interest rates have depressed values for government and corporate bonds, and since the cautious approach relies heavily on these, portfolio growth has been adversely affected. In the meantime, the stock market has decided World War 3 is unlikely to break out and that investment in businesses is the way to go.
As always, there is no easy answer in the short term, however the present uncertainties underline the importance of a balanced approach, rather than the search for “good returns” year on year. Simply put, the ideal balanced portfolio should be split between property, shares and cash, and it’s also necessary to be aware that there will be times when the gameplan appears not to be working. It is essential however that sticking to it is key and that knee-jerk reactions are incompatible with long-term financial planning.
Money on deposit is never going to make you exciting returns but it is nonetheless an important fallback when times are difficult. A contingency fund is essential. Remember, your money is also likely to lose value because of inflation, so you need to carefully consider the percentage of your assets you are willing to leave in cash. The best interest rates on offer involve a fixed term, so it’s important to be sure that you won’t need to access any of the money you tie up.
With property investment it is never easy to pick exactly the right time to buy but if you are planning to hold on to your investment for the longer term, you are likely, if not guaranteed to make money. In the meantime, the rental income, even after management costs, should be an improvement on the meagre rates of interest offered by banks and building societies. Whilst property can be considered an illiquid asset, it should be automatically included as part of your portfolio. Don’t forget, people always need somewhere to live.
Building a share portfolio can be an absorbing hobby and we have many clients who like nothing more than consulting their figures daily. Buying individual stocks is inherently risky, so a spread of holdings in a spread of sectors is essential. If you don’t want this level of involvement however, there are two broad options: collective investments or hiring a discretionary fund manager (DFM) to select and manage your portfolio. Both involve additional costs, but you’ll find a DFM may not be that interested in your money unless the company is managing more than £1/2m.
Gold is viewed as a safe haven in turbulent times but a look at the gold price index over the past 10 years shows just how volatile it can be. Prices rose sharply with the onset of Covid and then with the invasion of Ukraine earlier this year. The problem is that the current price at time of writing is some 5% short of its all-time high. There may be a case for saying gold and indeed other precious metals should form part of an overall portfolio but the weighting within the portfolio and timing of the investment needs to be carefully considered. It’s anything but a one-way bet!
I’m often asked about bitcoin and similar virtual currencies. I may be showing my age, but I view these as nothing other than glorified Ponzi schemes, such as those promoted by Bernie Madoff. This is because the investment strategy presupposes that you are going to have a buyer for your virtual asset when you want to sell. There can be no guarantee that this will be the case, and asset values are often subject to extreme volatility. My blanket recommendation is to steer well clear of bitcoin and the like unless you can afford to lose your money.
The FCA has in the past been behind the curve in terms of consumer protection but has gradually raised its game. Previously, geared, offshore domiciled funds were marketed to the public when such highly complex products should only have been sold to sophisticated investors. They were unregulated, which meant that there was no safety net in the shape of the FSCS if things went badly wrong, through either mismanagement or fraud. This was clearly an abdication of responsibility, as too great a burden was placed on the client’s shoulders. Now such investments have been removed from the public marketplace, which can only be a good thing.
To sum up, in the absence of a miracle solution, we must return to the concept of a spread of asset classes. Choosing as far as possible an uncorrelated mixture of asset classes must be the answer in my view.
This might in fact be the time on your life when spending money on what you previously may have considered an unnecessary luxury might at the end of the day represent your best investment decision. If you have been nursing a secret hankering for a vintage car for example, why not just say to hell with it and go out and buy yourself a 1971 Citroen DS Pallas? [Porche Boxter 986 surely – Editor’s husband is begging] It might be worth getting an expert opinion from someone – not me by the way – who knows about cars as to its general condition. You are of course going to incur servicing and repair costs but, in the meantime, you can take exhilarating road trips through the vineyards of Kent, or Bordeaux for that matter in Pullman-like luxury.
You could apply the same logic to investment in works of art. If you have always wanted a Matisse sketch or a view of Montmartre by Utrillo, then why not? Clearly such works need professional authentication, but it is very possible that over a 10-year period, the picture on your wall or your iconic automobile will outperform all of your other investments. At worst you can provide yourself with many hours of pleasure from your investment, which would not be the worse outcome.
Joe Coten is a member of the Personal Finance Society. He may be reached on 0207 588 9626.