The market is challenging at the moment and world events are adding to the uncertainty. As an investor, you may be considering ways to strengthen and protect your investment portfolio.
When you invest, your portfolio will rise and fall with the market – there is no way around this, especially in the short term. But when we think about a longer timescale, there are a few actions you can take to help make sure your portfolio is in a better position.
Choose the Right Risk Level
A key consideration within investment planning is the relationship between risk and reward. Generally, a lower risk portfolio will be more stable than a higher risk portfolio, but won’t offer the same potential returns over the longer term.
There are many different types of risk, but in this context, we are referring to the volatility of your investments. A portfolio containing mainly equities is likely, on average, to be more volatile than a portfolio of bonds and cash. This means that the value will fluctuate more and there is a higher chance of losing money in the short term. However, over the longer term, the equity-based portfolio will have a greater chance of producing inflation-beating returns.
Of course, other assets such as bonds and property carry their own risks and there are some situations where they will lose more than equities. But when constructing an investment portfolio, it’s important to look at long-term averages rather than short-term anomalies.
If you have an investment timeframe of at least 10 years and are comfortable with the concept of risk versus reward, it’s likely that a portfolio containing mostly equities will be most suitable for you. If you have a shorter timeframe or are a more cautious investor, you may wish to include other assets to tone down the volatility.
Investing at the right risk level means that the portfolio is more likely to meet your expectations in both a falling and rising market. This gives you a greater chance of achieving your goals.
Diversify Your Assets
We have mentioned the main asset classes above – equities, property, bonds, and cash. A portfolio will generally contain a mix of these asset classes. The proportions will depend on the risk level.
But beyond this, it’s important to diversify your investments within each asset class. This can mean investing across different world regions, business sectors, or types of company.
The reason for this is simple. By not concentrating too much of your portfolio in one area, you limit exposure if anything goes wrong. Different sectors of the market won’t necessarily rise and fall at the same time or to the same extent. Some carry more risk, but offer greater potential for reward.
Rather than making tactical decisions over what is likely to do well at a particular time, it’s far more effective to invest in a wide variety of assets. This means that you can still benefit from market growth while spreading the risk.
Keep a Cash Buffer
You might not consider cash an investment, but effective cash management can make all the difference to an investment plan.
It’s generally recommended that you should keep at least six months’ regular expenditure as an easily accessible emergency fund. This means that if you are faced with an unexpected bill or are unable to work for a short time, that you won’t need to dip into your investments at short notice.
Additionally, if you are reliant on your investments for income or have any major planned spending, it’s worth keeping enough cash to cover your requirements for the next few years.
It’s generally sensible to limit withdrawals from your investments or stick to a planned schedule – this maximises the potential for growth and reduces the chance that you will run out of money later.
But more importantly, if you need to access your investments at short notice, and the market has taken a downturn, it can take much longer to recover your losses than if you had awaited a recovery.
Keeping a cash buffer gives you more flexibility and control over when to draw on your investments.
Stick to the Plan
Investment planning is genuinely for the long-term. This means a minimum of five years, as this is generally enough time to recover from any short-term volatility. But to really see the benefits of your investments, you need to think much longer.
When the market rises and falls, and the media is telling us that the economy is under threat, this can be concerning for investors. It can be tempting to take money out to avoid further losses. But there are a few reasons why this would be a mistake:
- The market is efficient, which means that any information which could affect the value of your investments is already accounted for in the price. By this point, it is already too late to benefit.
- A downturn is often swiftly followed by a recovery. Taking money out means missing out on this.
- Markets do not move in a smooth line – we expect peaks and troughs. Much of the long-term return comes from the ‘bounce’ following a downturn.
The same applies to making tactical shifts in the hope of benefiting from higher performance – this is usually counterproductive. Making frequent changes can mean missing out on growth.
If you have invested at a suitable risk level, your portfolio is adequately diversified, and you have a cash buffer, you don’t need to worry about the short-term fluctuations. Your investment plan is strong enough to ride out the storm.
Please don’t hesitate to contact a member of the team if you would like to discuss your investment options.
The content in this article was correct on 12/01/2024.
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