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Using diversification wisely across your investment portfolio is easy to put in place once you have a clear idea what your options are.
The purpose of this in depth investment article is to explain what is meant by proper diversification and the use of “Multi-Manager, Multi-Asset Class” investing, which aims to grow your money in real terms (i.e. after inflation) by investing across a broader range of asset classes than traditional investments do.
Let’s get started!
The following article is designed to give individuals an insight into the different ways we can invest in property. Whether it’s a direct investment into residential or commercial property or putting your faith in one of the many retail funds out there, there are many routes you can choose if you want to get access to this particular asset class.
As well as focussing on the various methods of investing, we shall also look at the benefits and drawbacks of putting your money into property, as opposed to different asset classes such as gilts, fixed interest, cash or equities. As this article was written specifically for your accountant’s publication, we shall also have a comprehensive look at the various tax implications of investing in property.
The article will also partly focus on the type of returns that property has provided in the past, so that by the end of this article you should have a much clearer understanding of the nature of investing in property and will be a much better position to decide if this type of investing is for you.
All investors are taught early in their careers that the two dominant emotions in financial markets are fear and greed.
Cold rational analysis of facts is all well and good but when emotion takes hold it over-rides everything else; to paraphrase one of the most important adages, JM Keynes preached that the markets can remain irrational longer than anyone can remain solvent.
It is also a truism though that every scare story that has ever spooked markets has been highly credible at the time.
Whatever story it is that is driving sentiment has to be based in reality. Like a good horror film, the greatest terror comes from what is unseen, unsaid and implied. The markets have not recovered from the trauma of the 2007-2009 crisis and still carry the baggage of that great banking disaster. This has become their Achilles Heel and any mention or suggestion that we are heading to another banking meltdown triggers hyperventilation and a panic attack.
The summer months have seen global markets of all descriptions running scared by Europe. The argument is terribly and deceptively simple: the debt can has been kicked down the street for too long and a number of European countries can no longer meet their obligations.
Defaults on sovereign debts, it is argued, are inevitable and will lead to losses on these bonds, the majority of which are held by European financial institutions. These losses in turn will lead to bank insolvencies as national governments can no longer afford to fund further bail outs, the banking and insurance system will collapse and the world will again run out of money. This, so the theory runs, will result ultimately
in the breakdown of civil order.
I am increasingly talking to clients who have pensions, but who aren’t being given regular financial reviews or who aren’t having their attitude to risk assessed regularly. It is absolutely vital that you receive regular financial reviews on you pension and that you have your attitude to risk assessed at least annually to ensure your pension is performing in a way you want it to and that when you get to retirement you receive the amount of income you want and need to live a comfortable lifestyle.
How much investment risk is right for you?
Every investment involves risk and, generally speaking, the greater the return (or growth) being sought, the greater the risk that needs to be taken. The problem is that while it is easy to measure return, it has been very difficult to accurately measure the amount of risk being taken. We’ve seen many examples in recent years of investors not fully understanding the level of risk they were taking until it was too late - gold, commercial property and residential buy-to-lets spring to mind. On the other hand, there are many investors who are so risk averse that they fail to meet their long-term goals. Understanding the right amount of risk to take is possibly the most important aspect of any financial plan.
Matching your attitude to risk to your investments
The good news is that it’s now possible to accurately assess not only the level of risk of an investment, but also your individual attitude to risk. By matching the two, we are now able to give you the peace of mind of knowing that you are neither taking more risk than is comfortable for you, nor too little risk and so reducing the chance of meeting your goals. Financial markets are becoming ever more volatile, the array of investment products is becoming more and more complex and, over time, your own personal circumstances will change so it’s more important than ever to correctly understand the amount of risk you are taking. What’s more, the sophisticated tools now available not only allow us to assess your attitude to risk and recommend the right initial mix of products, but mean we can keep your investments on track over time.
What could the consequences of not having regular financial reviews be?
Black Monday – October 1987.
By the end of October the UK Stock Market had dropped more than 26%, the US Stock Market dropped more than 22%, Hong Kong and Australia both dropped more than 42%. To this day the reason it happened is still argued about.
(Source: On this day BBC website)
Between February 2006 and February 2011 the difference in performance in the best and worst funds in the IMA UK All Companies sector was 140% (the equivalent of 28% per year).
(Source: Lipper Hindsight 22nd March 2011. Bid to Bid with income net of UK tax reinvested)
Over the last 5 years, the Canada Life/ Henderson Multi Manager 4 fund has given an annualised return of (– 1.2%) meaning £1,000 invested 5 years ago would be worth £942. This fund had a volatility (a measure of the amount of risk the fund manager has taken) of 4.1
Over the same time period the Phoenix R Sol/ Newton Balanced fund has given an annualised return of 8.5% meaning £1,000 invested 5 years ago would be worth £1,503. This fund had a volatility of 4.2
(Source: Money Management May 2011)
If these statistics worry you, if you don’t know how your fund has performed in relation to its benchmark, if you don’t receive regular financial reviews on your pension or if you just want to talk through any concerns you may have please contact me on 0800 321 3508 – free from a landline, call me direct on my mobile at 0757 679 1009. Or drop me an e-mail.
The speed at which markets can shift direction is a constant source of amazement. It was only last autumn that the great fear was that the western world was following Japan into a multi-decade period of low growth and persistent deflation. Debts had to be repaid, it was argued, and the only way for this to be done was slowly and steadily. And until this was done there was no basis for a resumption sustainable growth in the UK, United States or Europe. But now this is all forgotten. Markets are instead abuzz with inflation, food prices, commodities and the timing of interest rate rises. There are no guarantees that this phase will last any longer than the previous Japanese obsession and we expect that these sudden and severe changes in sentiment will characterize the year ahead. We thus retain our diversified strategy, leaning towards a cyclical recovery but not to the exclusion of any other potential eventuality.
The trends in markets we are seeing in the early stages of 2011 can be traced back to the announcement of the restarting of quantitative easing in the United States last autumn. Since that time we have seen investors globally rebuilding their protection against inflation; prior to then the relative valuations of equities and bonds showed that deflation was seen as the greatest threat facing markets. UK equities yielded more than gilts for the first time since the 1950s, other than at the bottom of the market crashes in 2003 and 2009. This time it was not the result of the text book irrational selling at the bottom of a crash, but came instead from the lowering of bond yields. The Federal Reserve Bank’s insistence however that it will add up to $1 trillion to its purchases of treasury bills has shaken investors’ confidence in these extreme valuations. Almost to the day of the announcement we have since seen equities given renewed life, commodities surging, bond yields rising and gold underperforming.
You can download this Market Commentary as a PDF file by clicking here or continue reading online
Steady as she goes
Investment markets remain resolutely nervous. This, though, is a thoroughly good thing and means that we can continue our long-standing strategy of cherry-picking exceptional value as and when prices fall, rather than the alternative of having to chase runaway prices upwards. The latest bout of the collywobbles has come from Ireland, which has followed Greece into the euro crisis locker. Whether or not this was justified will be argued over for many years, but the timing in taking the wind out of the sails of the optimism that had built over the previous couple of months was fortuitous. The damage done to global equity markets has been very slight, while bond markets are reacting more to the Federal Reserve Bank’s expansion of the American programme of quantitative easing and the heightened risk of inflation that this brings.
The markets are still prepared to back neither inflation nor deflation as the more likely course of events with anyconviction. The reaction to the Federal Reserve’s announcement of its trillion dollar extension to its bond purchase programme was to buy equities and commodities, but this was no more than a minor swing in the relative valuation of asset classes and has already unwound slightly. There is an additional factor here that as we near the end of what has been a highly challenging but ultimately rewarding year, fund managers will be looking to bank the returns that they have made rather than run the risk of seeing thes evaporate during December.
You can read the full article online or download the PDF version of this investment advice and market commentary.
Click here to download
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Here is an interview William gave on BBC Radio Scotland where he spoke with Fred MacAulay and Karen McKenzie about Cash and Investment ISA's
Listen to the BBC show here
