Top three tips for… investing in uncertain times
Posted on Sep 17, 2019
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In our new series of blogs, members of our team discuss their ‘top three tips’. Here Stuart Foden reveals his top three tips for investing in uncertain times:
Tip one: Ensure you have a readily available cash reserve
Here at The Goodman Partnership, our highest priority is to ensure we are not taking undue risk with a client’s capital.
The amount of money invested in alternative asset classes, other than cash, must be properly assessed and determined by the client’s requirements, objectives and attitude to investment risk. This is the fundamental starting point for the financial planners. Only then can we determine how much should be retained in cash to meet short-term requirements and how much could be invested in order to provide the potential for greater real rates of return than cash and inflation over the longer term.
Other asset classes such as stocks and shares and commercial property have generally provided better inflation adjusted returns than cash over the medium to long term. However, this capital would be subject to sometimes significant price changes and falls in value. If a client is reliant on this capital to provide an income, perhaps part of a retirement strategy, it is usually sensible to revert to the cash holdings for this income during uncertain or volatile times, so as not to further dilute the capital value of the invested monies.
Tip two: Diversification is key
At its simplest level, diversification means not putting all your investment eggs in one basket. The theory is that the performance of different assets is not directly correlated. For example, if the UK stock market was to fall, the price of certain fixed interest securities is unlikely to fall. This principle can also be applied to an individual asset class.
Even within the same asset class, greater diversification can be achieved by investing geographically, i.e. Asian equity markets are not directly correlated to UK equity markets. Even within UK equities, diversification can be achieved by investing in smaller and medium-sized companies alongside large, ‘blue chip’ companies.
Alternative asset classes such as gold and infrastructure can potentially dilute the overall volatility of the invested capital. Our wealth management process creates a number of asset class model portfolios, blending the various asset classes and styles together to ensure diversification is maintained. The greater level of risk the client is prepared to accept, the higher level of exposure to growth assets, such as stocks and shares, will be held. However, the benefit of diversification should mean that a client should not witness significant fluctuations in value on a regular basis of their invested capital.
Tip three: Time in the market, not timing the market
Everyone thinks they are experts when it comes to making investment decisions about when to enter and exit a particular stock market or investment. In our experience, there are two types of investor – those who don’t know how to time the market and those who don’t know they don’t know how to time markets.
Research from leading investment companies, such as Fidelity, has consistently proven over certain investment periods that investors who continually enter and exit markets to try and increase profits end up worse off than those who simply stay invested.
Accordingly, our view is that investors should stay invested during volatile times and take action, such as switching off regular withdrawals and reverting to cash. Sometimes it can also be sensible to consider topping up a particular investment or wrapper when markets are low but ensure you have a plan in terms of when a suitable opportunity may arise, rather than waiting for the bottom of the market as it is incredibly rare to get this right.
Stuart Foden joined The Goodman Partnership as a Paraplanner in 2002 and now heads up the Paraplanning department and overseas the Wealth Management unit. Stuart previously worked in discretionary fund management and private banking. His role involves co-ordinating all areas of product, fund and wealth management research, as well as managing and getting involved in the recommendation report writing for the financial planners.
Stuart has over 25 years’ experience in the pension and investment industry, having worked for Lloyds Private Banking, Adams & Remers Solictors and Marsh Mclennan.
He is a DipPFS member of the Personal Finance Society and holds the Level 4 Certificate in Investment Management from the Chartered Financial Analyst Institute.