A second look at portfolio risk: Are you really playing it safe?
I’VE NEVER been a fan of the “best buy” lists published by the major fund platforms. But I always find it interesting to see what is attracting the hard-earned savings of private investors. The best-selling funds lists for September reveal the usual suspects: UK equity income, emerging markets and a couple of specific sector funds like biotech and healthcare.
The best buy lists from the past five years haven’t looked much different, albeit with an occasional smattering of bond funds. Unsurprisingly, investors are still hungry for income from stocks at a time when cash Isas don’t always beat inflation, typically paying less than 1 per cent.
More surprising is that the allure of the emerging market growth story, always popular with private investors, still appears to be intact. This is despite the fact that emerging markets have dramatically under-performed developed markets – by almost 50 per cent – since the start of 2011.
Buying a best-seller each year can lead to a very unbalanced collection of funds, rather than a strong portfolio. Many investors are still holding on to the China fund they bought in 2007, or the best-selling gold mining fund from 2011, despite heavy losses. Instead, investors should concentrate on building a cohesive portfolio, aligned to how much risk they are comfortable with.
FINDING YOUR COMFORT ZONE
Too much risk in your portfolio carries obvious dangers. But not taking enough can also be hazardous, particularly if you are planning for retirement. Too low a risk level in the early years of investing could lead to lacklustre performance, affecting your later quality of life. However, taking on too much risk close to retirement could have a serious impact on your savings in the face of any market volatility.
Investing is about knowing what risks to take, and when. Staying invested during downturns means that any losses will have time in the market to grow again. History tells us that diversifying can give you a smoother ride along the way.
In the 14 months from the start of 2008 to the end of February 2009, the FTSE All-Share Index lost an incredible 38 per cent – even with dividends included. A more “balanced” portfolio of half UK stocks and half UK government bonds would have lost about 15 per cent over the same period.
That is still a big loss – if you sold. Left alone, the balanced portfolio would have been back in the black by November 2009. Forgotten about for the next five years, that same portfolio would now be worth 43 per cent more than at the start of 2008 (not including fees). By the way, that’s a better gain than even London house price rises over the same period.
Your ability to take on “paper” losses and stay in the market is crucial.
Shaun Port is chief investment officer at Nutmeg.