Developing your investment strategy

Investment strategy

Please note that this article is over six months old. While Blevins Franks takes care to make sure that information is accurate on the date of publication, some content may change over time. You should not rely on the accuracy of legislation and tax information in this article; take professional advice for your circumstances.

Developing an effective investment strategy is essential for increasing your chances of earning positive returns.

Why do we invest?  For most people, it is to ensure we have sufficient retirement savings to enjoy the benefits of working hard throughout our lives, making the most of our free time, and knowing we have enough in reserve to cover unexpected high costs like healthcare.  Many of us also want to leave money to our children and grandchildren, to help make their path through life easier.

Our savings therefore need to keep pace with inflation to maintain our spending power as prices rise.   Otherwise, our later retirement years may not be as comfortable as expected and extra expenses can become more worrying.

If we want to beat inflation, we need to invest appropriately.

After more than a decade of rock bottom interest rates, cash may now be appearing as a more attractive option.  But what happens when you compare bank interest rates to your rate of inflation? Are you earning negative rates of real return?  And what will bank and inflation rates be in 10 and 20 years’ time?  Even looking in the near term, the recent rise in interest rates have been tactical to combat inflation. Once that is in under control, bank rates are likely to reduce.

While keeping some savings in cash is recommended, holding a larger proportion of your savings in the bank is risky.   Cash has proven to underperform inflation over the long term, while global equities and bonds beat it.  Since 1995 global equities have risen by around 832%, global bonds by around 195%, inflation (consumer price index) by 95% and cash by 72%.

Successful investing isn’t easy, but following proven principles can reduce risk and avoid common pitfalls. With the help of a trusted financial adviser, you can turn your objectives into reality.

Trying to time the market

Financial advisers are frequently asked if “this is this a good time to invest?”.  For longer-term investors the answer is ‘yes’ more often than not – successful investors are marathon runners, not sprinters. Staying invested over the long term usually gives the best returns, as opposed to trying to time the markets. When markets fluctuate it can be tempting to buy and sell investments to chase short-term gains, but this will rarely help you meet your longer-term financial goals.

When you look at a long-term stock market chart, the upward path is typically clear. It may be a jagged line as markets react to global events, but from the long-term perspective you can easily see how markets tend to recover and resume heading upwards.

Ideally we would enjoy all the upsides and avoid the downsides, but this is impossible. Attempting to do this is fraught with risk.   You have to speculate on what future market movements and world events will be and get it right over and over, and contend with short term fluctuations.

Even if you don’t intend to ‘play the market’, you may let emotions sway investment decisions.  Reacting to current conditions is usually too late.  The event has already happened and markets are looking forward.

If you get caught up in euphoria you may buy when investments are at their most expensive. If you panic when markets fall you may sell at their lowest and lock in your losses.  If you do sell before shares finish falling, you need to judge when to get back in.  Rebounds are often sudden and you miss the opportunity to recover what could have just been ‘paper losses’ (i.e. unrealised losses)

Missing the best days

Missing the best performing days can make a considerable difference to returns.

As an illustration, let’s say you invested £10,000 in UK companies (FTSE All Share Total Return) for the 10 years up to the end of 2022.  If you stayed invested throughout, you would have enjoyed a gross profit (before fees and charges) of £8,824.  If you missed the five, ten and twenty best days, though, these profits would have dropped to £4,619, £2,415 and -£631 respectively. Missing the best 30 days meant losing £2,700. Being out of the market can carry risk too.

Waiting to invest

What if you have capital to invest?  We often come across people who intend to invest for the long-term but are holding onto available capital.   They’re waiting for external events to unfold first to feel more positive that they won’t suffer losses.

Sitting and waiting for the perfect time to invest is effectively trying to time the market.  You may not be rewarded for your due diligence and end up with lower overall returns.

If you are particularly cautious, consider the ‘pound cost averaging’ approach where you spread the timing of your investments by investing in tranches. This can help smooth volatility and potentially improve average returns over longer time periods.

Spreading risk

To earn returns that keep pace with inflation we have to accept some risk.   But you can take steps to reduce it.  First of all, your strategy must be suitable for your situation, time horizon, risk appetite and goals.

Then you need layers of diversification.  It is generally accepted that well-diversified portfolios usually achieve better returns than those with limited spread. Different assets and regions perform differently and can vary significantly year to year. Having a managed, diversified portfolio covering a range of asset classes, regions and sectors, tailored to your individual requirements, will likely generate better returns with less volatility (i.e. risk-adjusted returns).

Choosing an adviser who uses a dynamic ‘multi-manager’ approach can help increase diversification. By combining several carefully selected fund managers, this reduces reliance on any one manager making the right decisions in all market conditions.

Your investment plan and maintenance

If you don’t yet have a strategic investment plan in place, start by looking at your situation and objectives.  What stage of life are you at? What assets do you currently own? How much risk are you comfortable with? What are you trying to achieve? What are your current circumstances and future plans?

These important answers influence what the asset allocation of your investment portfolio should be, which is possibly your biggest decision. Work with an adviser who can objectively assess your attitude to risk to create your suitable, long-term investment plan.

Build a relationship with a trusted adviser to ensure that you are patient and stick to the plan. This helps keep your emotions in check when markets get carried away, so you avoid jumping into bubbles or selling with the masses after market corrections. Working together, you may be able to use a market correction as an opportunity to shift some of your asset allocation to potentially improve returns over time.

Investing for the long-term does not mean invest and forget.  You need to review your portfolio annually to check it remains on the right track. You may need to rebalance assets to maintain your risk weighting or make adjustments if your personal circumstances have changed.  If you use a financial adviser to set up your portfolio, they should carry out this annual review for you.

Holding your investment portfolio within an arrangement that is tax efficient in your country of residence will help protect your capital from unnecessary taxation as well as inflation. Seek advice from an advisory firm that provides holistic strategic financial planning solutions and that can integrate your investment management with your tax and estate planning.

At Blevins Franks, when working with our clients to build their portfolio, we follow a simple, disciplined process:

The first step is to agree on what your objectives are. The second step is to agree upon a plan to achieve your objectives and the last piece of the puzzle is to decide upon a suitable, well-diversified portfolio to achieve your plan and ultimately your objectives. As a part of this process, from a risk point of view, we take each client through an academically designed suitability process, which helps us to determine their attitude to risk. With this information, we can ensure that they have the potential to generate the returns they require to achieve their objectives, but also ensure that they do not take on too much risk.

Having put the plan in place, we use good quality investment managers to make investment decisions on a day-to-day basis.

Contact us to learn more about our investment approach and how we can help you.

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.

Tax rates, scope and reliefs may change. Any statements concerning taxation are based upon our understanding of current taxation laws and practices which are subject to change. Tax information has been summarised; individuals should seek personalised advice.