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Proactive investors will find much food for thought in this interview, where one top wealth executive reveals their top “money lessons learned” to

David Cooke, Chair of the Investment Committee at Saltus Investment Managers, has been with the firm since 2010, having previously been an equity manager at a credit hedge fund and managing director of hedge fund sales at Dresdner Kleinwort. His wide-ranging experience across asset classes leads him to urge investors to always have risk management and diversification front of mind.

Make avoiding losses your primary aim 

While the need to avoid investment losses is obvious, Cooke cautions that often not nearly enough heed is given to how damaging even small losses can be when extrapolated over the long term. Mitigating risk may be the less exciting side of investing, but investors should never neglect this in favour of chasing bigger returns, he warns:

In the long run, the reality is that most of your returns come from not losing money and controlling your downside. Returns you can estimate, but never really know, whereas you should be able to control the risks to your portfolio far more tightly.

Managing risk is quite hard, but that’s the investment manager’s job. We can’t make the markets do what we want, but we can be very proactive about controlling risk.

Look at numbers, not labels to get to the heart of risk

One of the most vital tasks facing investors and their advisors is an assessment of their true capacity to assume risk. But while ascertaining the level of losses one could realistically endure is of paramount importance, Cooke also highlights the necessity of ensuring that your investment journey is going to be sufficiently comfortable psychologically. Therefore, he advises following his firm’s approach of looking beyond labels to consider how an investment portfolio is likely to behave:

We believe that using words like ‘cautious’, ‘balanced’, ‘growth’ or ‘adventurous’ is not helpful because people can leave the room with two wildly different interpretations of what ‘balanced’ means.

Instead we ask investors to think about how volatile they can tolerate their portfolio returns being, relative to the stock market. So, if you want returns to be half as volatile as the FTSE 100 then we might recommend to you our Saltus|50 portfolio, which is designed to meet that requirement. Having a number you can measure really helps you see what the investment reality will look – and feel – like.

Beware home bias and don’t just pay lip-service to diversification

Ensuring that your portfolio is diversified is a basic investment principle that Cooke believes is often given far too little attention. In his experience, people’s natural tendency towards a home bias means that self-directed investors often take far too narrow a view of global markets.

More subtly, he points out that a portfolio might look diversified on the surface while in reality being anything but – particularly if various investment funds have similar underlying holdings. As Cooke observes:

If you look at many investors’ supposedly diversified portfolios you will find many blue-chips, which will be mainly British, along with government bonds – or close proxies – and then a few other holdings that aren’t big enough to make a difference. That, to us, is not diversification; there are still too many eggs in the one basket.

Looking underneath the bonnet, the risks are often much more joined up than people think. If you have four or five different income funds you’ll see they tend to look very similar in their actual holdings. That can lead to some very nasty shocks.

Don’t try to be an expert across all investments

There has never been such an abundance of freely available and often very high-quality investment research available to the self-directed investor. But while achieving a certain level of expertise across asset classes and markets is possible by dint of sheer effort, Cooke believes this is still unlikely to deliver the best results. Far better, in his view, is to source the real experts for every investment view you wish to execute:

There are two broad approaches investment houses have: the first is to attempt to have the best ideas for every geography and every asset class in one building; the second is to asset allocate and ‘rent’ the best managers in each market and type of investment. We take very much the latter view.

We believe a multi-asset, multi-manager approach gets delivers optimal diversification and outperformance by allowing you to access the real experts on the ground.

Don’t rely on anyone else for your financial security (and particularly not governments)

Striking a particularly serious final note, Cooke urges individuals who have yet to make plans to really examine the numbers and make a clear-sighted assessment of what financial assistance – if any – the state will be able to provide throughout their retirement.

The new pension freedoms that have been introduced in the UK are certainly to be welcomed, but send a clear signal that complete financial self-reliance has to be investors’ retirement end-game. He warns:

In all honestly, the numbers around pension provision are looking quite frightening and it doesn’t look like there is enough wealth around to meet the promises we keep making future generations.

There are going to be an awful lot of broken promises from governments in the West because the numbers simply don’t add up. Retirement ages have already gone up, contributions are going up and things will probably continue like that.

The only solution is to ensure you take responsibility for your savings, start early and invest with at least a five- but hopefully a ten-year time horizon. There is very little, if anything, you can realistically achieve in a matter of months, so start as early as you can with whatever you can.

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Saltus Investment Managers is an independently-owned investment management house founded in 2004. With offices in London, Manchester, Chichester and Ringwood, the firm is known for its multi-asset, multi-manager, approach to investing.

Find out more by visiting our full profile of Saltus Investment Management, or to discover which wealth managers precisely suit your needs simply try our smart online tool.