Investment Portfolio Planning in an Uncertain World

After a lengthy negotiation process, the Brexit referendum has been set for 23rd June. As I write this, the opinion polls are giving no clear direction as to the outcome. Last week, the momentum was with the “remain” camp. However, after the emergence of Boris, things are too close to call and an increasing mood of uncertainty prevails over the impact on the economy and the subsequent effect on financial markets.

Uncertainty is unwelcome to investors, as it invariably causes unrest and increased volatility in the world’s stock markets. This has certainly been the case in recent weeks, where we have seen stock market prices initially falling by 8% before staging a 6% recovery in the year to date. So, against this backdrop, how can investors defend their portfolios against such uncertainty?

Don’t Panic!

It can be easy to get caught up with the turbulent conditions and negative news flow and decide to head for the exit and encash the portfolio. For the medium to long term investor, this is invariably a bad decision. When markets are volatile, there is a heightened chance that being disinvested will lead to the portfolio missing out on single days of significant market rises. The chart below illustrates this point.

It’s Time In, not Timing that counts.
The effect of being out of the market.


ftse graph text

 

Whilst adopting a long term buy and hold strategy will produce some ebbing and flowing in a portfolio, the longer term effect is that returns are likely to be superior to those produced by trying to time the markets. As someone once said, it’s time in, not timing the markets that counts.

Asset Allocation is the key

The chances of a portfolio achieving its goals are maximised not by chasing the latest market fad (Turkish Equities, anyone?), nor by chasing the latest star fund manager. Occasionally, clients ask me why we don’t sell out of markets when they are high and buy back when they are low; (if only I had thought of that). Rather than that, investors can achieve their goals by defining and sticking to an appropriate strategy over an extended time period. In this way, a portfolio can benefit from the main long term forces in the market.

The foundation of such an approach is asset allocation. This is not as simple as placing lots of eggs in many different baskets. Of course, such diversification plays a part, but a sound investment strategy takes this to another level. This is achieved by analysing the varying risk and return characteristics of different asset classes over a long period (we go back as far as 1927). Such considerations can enable an investor to combine different asset classes (delivering uncorrelated sources of risk and return) into a portfolio, with the aim of generating any desired level of return with the lowest possible level of expected risk.

Provisio have been using this technique since 2008, providing a selection of risk graded portfolios. These range from a “Defensive” low risk, low return portfolio, through to an “Aggressive” high risk, high return option. The proof of the pudding, as they say, is in the eating. Therefore, it is pleasing to be able to report that despite the challenging conditions of recent years, these portfolios are fulfilling their design brief, thus providing appropriate returns for clients with different risk appetites.

So, how should investors react to the current levels of market volatility? Assuming the portfolio is appropriately diversified and invested for the medium to long term, they should consider sitting tight. A well diversified portfolio should be able to weather difficult market conditions and deliver suitable returns over a sustained period. Of course, if investors are uncertain as to the suitability of their investment strategy, they should seek professional advice.

If you would like to discuss our thoughts on investment strategies please give the team a call on 01462 687337 or email info@provisio.co.uk.

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