There’s lots of advice swirling around re the do’s and don’ts of staying healthy during this testing time. My view? You can’t calm the storm, but you can calm yourself … the storm WILL pass. The question is, how healthy are your investments in these turbulent times?
FALLING INVESTMENTS? … what’s the plan of action?
Even during some of the market’s worst periods like 2008 in the midst of the financial crisis, Buffett’s advice was: “Buy stocks.” For those who may not have heard of Buffet, he is considered one of the most successful investors in the world and has a net worth of US$88.9 billion as of December 2019, making him the fourth-wealthiest person in the world. Many of those who held their nerve during the ensuing turbulence in the financial markets in 2008 saw impressive gains when values rebounded, as demonstrated by the following graph …
Buffett doesn’t try to capitalize on small day-to-day stock market movements (we would call this micromanaging if I relate it to our clients’ portfolios). Instead, he focuses on a company’s business, because he knows that, over time, the stocks of firms with strong businesses and good long-term prospects are likely to rise considerably, regardless of what those stocks are doing today or tomorrow or next week. To find those strong businesses, his strategy goes back as far as a decade into a company’s history, so only stocks with consistent long-term track records can pass his methodology.
When assessing the viability of investments, Buffet considers these key variables … the 10 year track record of a company, including 10 years worth of earnings, 10 years worth of high returns and free cash flow.
HOW DOES THAT TRANSLATE WHEN ASSESSING MY OWN PORTFOLIO?
OK, so when considering your own investment/pension portfolio, you need to be mindful of even more variables (that’s why I highly recommend you take advice from a QUALIFIED specialist in this area). Most people would not want the high level of risk associated with buying individual stocks and shares. Typically, most investors hold a bond/wrapper/platform within which there are a number of underlying collective investments … or at least, there should be a number of underlying collective investments!
Let me explain how to assess the health of your own portfolio. History teaches us a lot, and in the investment world it tells us that there are two types of risk … systematic risk and non-systematic risk. Systematic risk is what we are experiencing now with the effects of the Corona virus on the markets. These are events that are out of our individual control … earthquakes, hurricanes, and political events such as BREXIT, Trump and China. Now we have viruses to add to that list!
Systematic risk is the baseline risk that cannot be controlled. If the markets move because of a particular situation, it tends to affect everybody, no matter how much diversification you have. However, the main tool to be used to reduce risk as low as possible, to reduce it to the nearest it can be to the systematic risk, is diversification. Without diversification, unless you’re a gambler and are particularly clever at picking the right investment at the right time, and have a crystal ball to see into the future, you’re stuffed!
The following chart demonstrates what happens to risk as you introduce more diversification.
What is Diversification?
Diversifying your portfolio means including assets from different industry sectors, different areas geographically, different investment managers so that you hold more than one view of the markets, and also involves the use of active and passive investment management.
Active investment managers take a view of the markets and make decisions based on their view and also based on their investment process AND investment guidelines and restrictions. The risk can be lowered further by including passive investments such as index tracker funds. By incorporating index tracker funds into your portfolio you will be adding diversification and taking away the risk of a fund manager underperforming the index. But this isn’t the whole story, you also need to consider:
Asset allocation (the process of dividing a portfolio among major asset classes, such as bonds, stocks, or cash).
Liquidity (whether a fund deals monthly/weekly/daily and the levels of cash retained within the fund for redemption requests).
Volatility (the amount a fund investment value moves up and down – volatility presents opportunities to buy assets cheaply and sell when overpriced).
SHOULD I SELL NOW AND SIT IN CASH?
If you were invested in December 2018, you may remember that equities fell by about 20% because of concern about rising interest rates in the US. They subsequently bounced back, so if you’d sold investments at that time you would have missed out on the rebound that followed during 2019. Remember, it’s a marathon not a sprint!
To ensure our clients portfolios are as robust as possible to deal with movements in the market like this, we carry out ongoing research, studying global news reports and economic data to assess how the changing environment could affect long term returns. We don’t ‘micro-manage’ our portfolios as this would lead to knee jerk reactions to short term changes. We thoroughly research every investment fund we include in our portfolios and monitor each closely for any change in investment ethos, liquidity, fund size, investment manager and consider also whether the fund offers value to a portfolio. We regularly review portfolios to ensure that the level of risk being taken is aligned to each clients attitude to risk. We also reconfirm that there is no change to our client’s attitude to risk when we meet at each review.
So batten down the hatches, stay invested and trust in the process that you put your faith in originally.
If you’re concerned about your own portfolio, speak to Speed Financial Solutions today – and remember that the investment environment changes all the time, so have regular reviews of how your affairs are structured to ensure that your portfolio is aligned to your attitude to risk AND offers you sufficient diversification to reduce risk as much as possible.
If you would like assistance from us contact email@example.com
Speed Financial Solutions are a highly qualified financial services provider looking after clients throughout Spain and the UK. We provide a discreet and comprehensive service to individuals, and our service is tailored to suit your needs taking advantage of tactical opportunities as they arise in respect of your pension planning. We seek innovative solutions for our clients and employ our skills, based on many years of experience, to apply tax legislation to your advantage. Our relationships are built on trust and mutual respect. We are ready to answer your questions, giving you the confidence you want when dealing with a sensitive issue such as discussing your pensions, investments and savings.
Our Principal, Andrea Speed, is a qualified Discretionary Investment Manager specialising in Investment and Risk, Taxation and Trusts, and a qualified Pension Specialist. Andrea is also a Fellow of the Chartered Insurance Institute (CII), which is the world’s largest professional body for insurance and financial services in the world.
Fellowship is the highest qualification awarded by the CII and is universally regarded as the premier qualification. It is a major achievement in the financial industry and demonstrates the acquisition of skills and knowledge at the highest of levels.
Along with a Fellowship, Andrea is a CII Chartered Financial Planner.
Please take a look at our website – www.speedfinancialsolutions.com
For further information contact us on Tel 951 315 271 or 951 318 529
We are happy to discuss your own situation in more detail. One of our advisers would be pleased to spend some time with you either in your home or at our office to review your current savings, investments and pensions, so do call to make an appointment. Our Financial Review is completely free of charge and without obligation. Follow us on Facebook for regular updates.
The contents published are not recommendations or decision aids for your investment decisions and they do not constitute any type of advice. We are not tax advisers and independent tax advice should always be sought.
Andrea J Speed FPFS (DM), M.A.
Principal, Fellow and Chartered Financial Planner
Speed Financial Solutions
19 March 2020