Investing For Growth: The Three Main Principles (Part 2)


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.

If you are investing to grow your money, I normally recommend three main principles: (1) time in the market; (2) spread the risk and (3) regular reviews. In Part 1 I discussed how ti

If you are investing to grow your money, I normally recommend three main principles: (1) time in the market; (2) spread the risk and (3) regular reviews. In Part 1 I discussed how time in the market is usually more beneficial for individual investors rather than timing the market. I now move on to look at the other two principles.

Spread the risk ? don?t keep all your eggs in one basket

Investors usually tend to invest in their own domestic markets (for example, British investors prefer to invest in UK shares), which overexposes their capital to UK companies.

Statistics show us 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 asset classes perform differently according to the underlying economic and market conditions. Their performance can often vary considerably from year to year.

Comparing annual performance figures of a range of investments (eg UK equities, Europe equities, North America equities, Emerging markets equities, property, corporate bonds etc) over a period of years and ranking them in order of success each year, illustrates how erratic asset performance can be and how fortunes can change from year to year. An asset that was the best performer one year can be one of the worst performers the next year, 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, even if it is currently performing well, can be very risky.

The solution is to own a range of assets classes, which cover 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 ? don?t rely on star funds

There are hundreds of funds available for investors to choose from, offered by many different managers. It can be quite hard to choose between them because they can appear very similar.

However, seemingly similar funds can produce very different performance results. For example, one illustration I have seen looked at ?1,000 invested in UK equities over the five year period to 31st December 2012. The top performing fund made a 92.3% profit, while the worst performer made a 52.1% 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. they are 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 in 2009, 2010 and 2011, 67 funds were in the top quartile in 2009. Only 40 of these funds remain in the top quartile the following year, and only 11 remained there in 2011.

Every fund manager has their own approach to investing. At different points in the economic and market cycle different processes do well. This means that some managers may underperform because the part of the market they specialise in is not doing well. The converse is also true; 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 also play a part in a fund?s temporary performance too. Successful investing is about distinguishing between the managers that got lucky and those that genuinely have superior stock picking skills.

All 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 will 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 find the best ones for their funds, and will then monitor them and replace them as necessary, for example if market conditions no longer suit their investment style.

Another reason to review your portfolio regularly, normally around once a year, is to re-balance it where necessary. 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. You should also consider if your investment objectives, circumstances and time horizon have changed.

Regular re-balancing helps to control risk and tends to have a positive effect on portfolio performance.

For personalised advice on a tax efficient investment plan for your objectives and circumstances speak to a wealth manager like Blevins Franks.

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.

By Bill Blevins, Bleivns Franks Financial Correspondent

16th May 2012

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.