The recent press coverage on Neil Woodford’s investment portfolios (find a typical article from The Guardian here), has reminded us all that making consistent investment returns is not as simple as it may seem. Many investors in the fund have tried to sell their investment as they have been uncomfortable with how much it has fallen in a given period of time (otherwise known as 'volatility'). Many investors weren't diversified, investing large amounts into this one fund, or 'putting all their eggs into one basket'.
Constructing an investment portfolio made up of several funds, which within each fund have several investments into various instruments (i.e. companies, commodities, bonds) is done to reduce volatility with the aim of increasing returns.
Using an Independent Financial Adviser to help you achieve this is worth around 3% in increased returns according to a research study by Vanguard. We do this by helping you understand your Attitude to Investment Risk, and thereafter recommending a suitable asset allocation and investment portfolio appropriate to this and reviewing your portfolio ensuring it is still suited to your circumstances regularly.
The investment conundrum
At its core, you are trying to buy assets that will be worth more later than it cost you to purchase them. Sometimes you are only interested in the increase in the share price, but for others it will be the combination of income and a rise in capital value that makes an investment worth having.
Selecting which assets to hold or sell, and which to avoid in the first place, has always been a complex problem. Traditionally, fund managers have selected a basket of investments and sold the rights to capital and income to retail investors, but over time economists and mathematicians have noticed that performance has not been as good as you might reasonably expect, especially after accounting for charges.
As a wild generalisation, most fund managers will underperform a given market, especially as their direct costs and fees will be a drag on the ultimate investment return. Digging through the research on investment returns has produced the idea that stock picking (this is looking for the “right” shares and buying only them), is ultimately hard to consistently do over the long term. Fund managers may obtain a temporary advantage, by having a better statistical model or better information, but in the long term their performance may return back to the average or market.
Modern Portfolio Theory earned Harry Markowitz a 1952 Nobel prize in economics. This suggests that diversification is a way of reducing risk by holding assets across sectors, asset types and geographical markets. Various critics suggest that this is not a realistic way of looking at the world, as the assumptions necessary are too general, but it does offer a solid basis for some more specific choices in fund selection.
The key metrics for a successful investment return are considered these days to be “time in the market”; diversity; and a suitable level of volatility. Stock picking is considered much less important than it once was. The practical outcome for an individual investor is to:
Invest as much as comfortably possible, as soon as possible, without running short of cash to meet day to day expenditure.
Diversify the investment holdings; get advice to avoid putting too many eggs in one basket.
Ensure your portfolio is designed around your Attitude to Investment risk; ensure that you are not taking more or less risk that you are truly comfortable with.
Ensure that the diversification is across asset types, geographies, sectors and time periods. Advised portfolios are usually more highly diversified than self-selected ones.
Use tracker funds where the market is considered mature and information is readily available.
Use managed funds where the market is specialised, and an expert may achieve an advantage with specific knowledge.
Manage cash to ensure that you never have to quickly sell an investment at a time which is not ideal within the market.
Arrange a Meeting to discuss and review how you are investing your money
Please contact Sarah Austin, Independent Financial Adviser at sja@martin-redmanpartners.co.uk or call on 01223 792 196 to arrange an introductory meeting, at no cost to yourself.
About Martin-Redman Partners
We are a team of experienced Financial Advisers who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice.
We offer expert independent financial advice throughout Cambridgeshire, Leicestershire, Suffolk, East Anglia and the South East. Many of our clients are within, or are in the surrounding areas of Cambridge, Grantham, Stamford, Bury St Edmunds, Frinton on Sea, Ely, Peterborough, Huntingdon, Cambourne, Newmarket, Soham and Oundle.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.