Heightened volatility is set to be the “new normal” amid a very much more complicated investment landscape for the next few years. Here, Richard Mitchell, Investment Manager at Quilter Cheviot, explains how the professionals will approach positioning portfolios and the potential pitfalls they can help investors avoid.
Is investing a lot easier than the professionals make out? One might think so if you look at the last couple of years. It almost didn’t matter what’s been in your portfolio over 2016 and 2017. Everything from emerging market equities to fixed income went up, allowing many investors to make money regardless of whether they were any good or not.
There is, however, a real danger in taking these returns at face value and thinking that by throwing money at the markets we’re bound to make positive returns in future. While all the major asset classes have performed strongly in recent years, there have been plenty of underlying sectors and securities where unfortunately placed investors might have lost their proverbial shirts.
While all the major asset classes have performed strongly in recent years, there have been plenty of underlying sectors and securities where unfortunately placed investors might have lost their proverbial shirts.
So, what do the professionals offer that you can’t just do yourself? The first thing I would point to is a healthy level of detachment and perspective. Behavioural biases are well defined in theory, but recognising and avoiding them isn’t always so straightforward, especially if we’re talking about your own money.
A couple of the following thoughts may have crossed your mind when managing your portfolio over the years:
“Ok, so ABC has had a terrible run, but I’d rather wait till it bounces back to the price I bought it at before I sell.”
“DEF has made great returns for me over the years, I used to work there, know and understand the business, and it’s a big part of my portfolio – I’m not going to sell it now.”
“GHI was a great pick by me; I really got that one right. Shame that JKL has had such a rough run, but that’s been because of external factors I couldn’t have foreseen.”
All of these are examples of established behavioural biases (loss aversion, familiarity and self-attribution to be precise). While being perfectly normal thoughts to have, they do serve to impair our ability to invest effectively. Professionals should be better placed to recognise and mitigate these factors when making investment decisions.
Behavioural biases are well defined in theory, but recognising and avoiding them isn’t always so straightforward, especially if we’re talking about your own money.
Professionals also offer dedicated time and energy. An investment manager’s job is to be monitoring portfolios, markets, economics, politics etc. on a constant basis. The amount of data available to us has never been greater, and the need to filter the signal from the noise has never been more acute.
This also extends to the sheer number of companies and investment products available to invest in. There are 2,168 companies listed on the London Stock Exchange alone, with thousands more international stocks and funds also available to investors. Having the resource to sort and analyse this data is critical in recognising opportunities, avoiding potential dangers, and ultimately making better informed investment decisions.
A professional money manager also offers the crucial service of determining an appropriate level of risk for your portfolio. This is not easily achieved as an armchair investor. An investment banker, for example, may like taking lots of risk and having high returns. But it might be better for them to take less risk with their savings given the volatile nature of their career.
There are lots of factors that feed into the level of risk to take when thinking about somebody’s portfolio. Amongst others, this includes an individual’s appetite for loss, the period of time the portfolio will be invested for, the proportion of overall wealth the portfolio represents, any income that may need paying out and so on.
All these elements need to be weighed against each other and an overall investment strategy implemented. This is not a straightforward process when a number of these factors are often at odds with one another. It should also be noted that this is a dynamic set of circumstances. What is right one year could become wholly inappropriate the next. Regularly reviewing your portfolio’s objectives can be just as important as checking up on your actual investments.
A professionally constructed portfolio should provide investors with access to securities, structures and asset classes from around the world. This gives you the best chance of meeting their objectives without taking undue amounts of risk. Rarely is a portfolio constructed from a handful of your favourite shares and perhaps a couple of bond funds.
What is right one year could become wholly inappropriate the next. Regularly reviewing your portfolio’s objectives can be just as important as checking up on your actual investments.
With market volatility picking up and certain investment trends looking somewhat long in the tooth, rarely has this breadth or market access been so important. Bond funds, typically seen as a safe asset, actually look riskier than they have done historically because of rising interest rates. Professional money managers are increasingly looking at other options, often alternative absolute return strategies or low-risk hedge funds – vehicles harder for individuals to access efficiently but straightforward for most investment houses.
I wouldn’t ever say that people can’t do a good job managing their own money. Colleagues of mine have clients who did a good job before coming to them, but who don’t want the stress and hassle of it all nowadays. But the investment backdrop is likely to become more complicated over the next few years. By taking advantage of the knowledge, tools and resource available to a professional, you give yourself a better chance of navigating increasingly volatile markets. It is a numbers game after all.
Professional money managers are increasingly looking at other options, often alternative absolute return strategies or low-risk hedge funds – vehicles harder for individuals to access efficiently but straightforward for most investment houses.
The investment strategy explanations contained in this piece are for informational purposes only, represent the views of individual institutions, and are not intended in any way as financial or investment advice.
Any comment on specific securities should not be interpreted as investment research or advice, solicitation or recommendations to buy or sell a particular security.
We always advise consultation with a professional before making any investment decisions.Always remember that in vesting involves risk and the value of investments may fall as well as rise. Past performance should not be seen as a guarantee of future returns.