The three main principles for investing for growth are: time in the market; spread the risk and regular reviews. Last week I discussed how time in the market is usually more beneficial for individual investors than timing the market.
Spread the risk – do not keep all your eggs in one basket
Investors usually tend to invest in their domestic markets. For example, British investors prefer UK shares, which overexposes their capital to UK companies.
Statistics show that investors who have a well-diversified portfolio of investments can often achieve better returns over the longer term than investing in a single asset class or region.
Different assets perform differently according to the underlying economic and market conditions. Performance can vary considerably from year to year.
Comparing annual performance figures of a range of assets (eg UK equities, North America equities, emerging markets, property, corporate bonds etc) and ranking them in order of success each year illustrates how erratic asset performance can be. Fortunes can change from year to year; the best performing asset one year can be one of the worst performers the next, and vice versa.
It is therefore very difficult to predict what will be the best performing sector each year. Being overexposed to one asset class can be very risky.
The solution is to own a range of assets classes, covering different regions, in a diversified portfolio. In this case it is often possible for investors to achieve better returns over a period of time, and with less volatility.
Review your portfolio regularly – do not rely on star funds
There are hundreds of funds to choose from, offered by many different managers. It is quite hard to choose between them.
Seemingly similar funds can produce very different performance results. For example, one illustration I have seen looked at £10,000 invested in UK equities over the five year period to 31st March 2013. The top performing fund made a 99.5% profit, while other funds in the same asset class made a 58.7% loss.
Even placing your money with a ‘star’ fund manager cannot guarantee continuous top performance. Past performance is not a guide to future performance.
When compared to similar funds, a fund’s performance can vary significantly on an annual basis. Some fund managers do continue to achieve top quartile results (i.e. in the top 25% of performance success), but many others slip down into the second quartile or lower.
If you look at the funds making up the IMA All Companies Universe for years ending 31st March in 2011, 2012 and 2013, 66 funds were in the top quartile in 2011. Only 27 of them remained in the top quartile the following year, and 26 in 2013.
Every fund manager has their own approach to investing. At different points in the market cycle different processes do well. Some managers may underperform because the part of the market they specialise in is not doing well. Conversely, at times mediocre managers can appear to have good performance if they have a tailwind as the market environment favours their approach.
The manager of a fund may change, which could affect performance, and luck can play a part in temporary performance too. Successful investing is about distinguishing between the managers that got lucky and those who genuinely have superior stock picking skills.
This is what makes multi manager funds so attractive. Sophisticated multi manager investment products combine the skills of several investment managers, usually among the best in their field. The managers have different specialities and styles to cover a range of market conditions, giving you another level of diversification to help spread risk.
The funds are actively managed - the investment company will research managers to employ the best ones then monitor them and replace as necessary.
It is also important to review your portfolio around once a year to re-balance it and consider if your investment objectives, circumstances and time horizon have changed. As asset values rise and fall, the asset allocation of your portfolio may have shifted away from the one designed to meet your objectives, and could now be riskier. It may be time to sell some assets and buy others to re-establish your original weightings, and your wealth manager should advise you on this.
Regular re-balancing helps control risk and tends to have a positive effect on portfolio performance.
You should seek personalised advice on a tax efficient investment plan for your objectives and circumstances from a professional wealth manager.
These views are put forward for consideration purposes only as the suitability of any investment is dependent on the investment objectives, time horizon and attitude to risk of the investor.
The value of investments can fall as well as rise as can the income arising from them. Past performance should not be seen as an indication of future performance.
Written by Gavin Scott, Senior Partner, Blevins Franks