Strategic Insights | Investment portfolios – they’re just like Rome
Give it to a robot!
Visit the App Store on your mobile phone, and you’ll find a plethora of robo wealth managers and robo advisers that can take a lot of the heavy lifting out of the process. In five minutes, you can put together a portfolio on your iPhone while checking the weather and sipping your coffee. But if you want the kind of expertise, experience and blue-sky thinking that can make all the difference between a lacklustre investment portfolio and one that is actually going somewhere, then really, your first step should be to discuss what you want from it with a living, breathing financial planner.
In this article, we take a look at some of the things our IQ financial planners discuss with our clients so they can work with them on putting together a successful portfolio.
What asset allocation is right for you?
When determining your individual financial circumstances and goals, we will look at factors such as your age and your time horizons – as well as your future income requirements and how much you have to invest. Needless to say, if you are just beginning your career, you won’t need the same investment strategy as someone who is about to put their child through university and then expects to retire in the next few years. Your time horizon will determine how conservative or aggressive your portfolio is.
We also look at your relationship with risk – your ability to accept investment losses in exchange for the possibility (remote or not so remote) that the cash with which you part will earn higher returns (the risk/return trade-off).
Are you of a nervous disposition?
Your capacity to tolerate risk is inextricably intertwined with how much time you have before you hope to reach your goal (retirement, paying off a mortgage, etc.). But there is a psychological dimension as well: how easily can you handle the capricious nature of the markets? If your goal is many years away, it’s easier to tune out market noise and serenely ride out those highs and lows, enabling you to take advantage of the market’s general upward progression. But if your horizons are more short-term, you will be less inclined to withstand such a risk.
Once we have an understanding of your circumstances, your goals and your attitude to risk, we can set about allocating your investments across different asset classes. It’s not a question of stripping risk out of the equation altogether: instead, we seek to optimise it for your individual circumstances and ultimate objectives. If your time horizons are very long, you won’t need to depend on your investments for income, so you’ll be able to afford to take risks in your pursuit of high returns. But if you are nearing retirement, you’ll want to protect your assets and your income from them in a tax-efficient manner.
Getting to work on it
Once you’ve determined an appropriate asset allocation, the next step is to divide your capital between appropriate asset classes. Fundamentally, this is straightforward: bonds deliver fixed income and equities tend to be more volatile.
But these classes can be further broken down into subclasses, all of which have their own levels of risk and potential returns. Your equities, for example, may be divided between different industrial sectors and companies of different market capitalisations… or between domestic and foreign stocks. Your bonds may be allocated between short-term and long-term ones… or between government debt and corporate debt, for example.
Whatever you end up putting in your portfolio, the watchword for ensuring the long-term growth of your investments should be diversification. At IQ, we know that money is like eggs: it should never all go into the same basket. You’ll need to mix-and-match your asset classes and strategies – low-risk and conservative for the pots to which you might need access in the short term, high-risk and more aggressive for meeting your long-term goals.
Tinkering, tuning, rejigging and revamping
Once we’ve built it, we don’t just leave it there to gather dust. That is not to say that we tinker with it relentlessly – we are not day traders at IQ. If you trade a lot, you don’t give your investments time to mature and you make less money. So we try to minimise investment turnover. But portfolios do need to be analysed and rebalanced periodically – changes in price movements may cause your initial weightings to change. We assess your portfolio’s actual asset allocation by categorising the investments and determining their values’ proportion to the whole.
And every change we make reflects your current financial circumstances, your future needs and your relationship with risk. If our financial review meetings with you reveal any changes, we adjust your portfolio accordingly. And if you become more risk adverse, we may reduce the number of equities held. Or you may feel ready to take on more risk – so we might move some of your assets into more volatile small-cap stocks, for example.
Once we have determined which assets you need to reduce and by how much, we decide which underweight assets should be purchased with the proceeds from selling the overweighted once. Whenever we undertake any rebalancing or make any adjustments, we look at the tax applications of selling assets at a particular time.
For example, your investment in growth stocks may have appreciated strongly, but selling all of your equity positions to rebalance your portfolio would mean that you incurred significant capital gains taxes. In such circumstances, it might be better just to avoid contributing any new funds to that particular asset class for the time being. That way, you will reduce your growth stocks’ waiting in your portfolio over time without incurring capital gains taxes.
We also keep a very close eye on your assets. If we anticipate any kind of pullback in those overweighted growth stocks, we may conclude that selling them is the best option despite the CGT implications. Our investment team is constantly monitoring the markets and using tools in order to gauge the prospects for your holdings.
Maintaining diversification above all else is fundamental to achieving a successful investment portfolio. It’s not enough to own assets in each asset class: you also need to diversify within each one. We ensure that your holdings within a given asset class are spread across an array of subclasses and industry sectors.
We try and minimise costs. Even a 1% fee over 20 years can constitute a significant headwind and eat into your performance.
We make sure you never overpay for an asset. It’s important to take advantage of dips and market corrections, rather than paying top dollar for everything.
The best-in-class expertise of our investment team and the strategies that they have developed mean that even individual investors with relatively small amounts of money can obtain the economies of scale that large fund managers and institutional investors enjoy.
Peter Lowman is the Chief Investment Officer at Investment Quorum, a Director of the company and an integral member of our investment committee.
This article does not constitute specific advice and investors should bear in mind that capital invested is not guaranteed. Investment Quorum is authorised and regulated by the Financial Conduct Authority.
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