How to invest
There is no substitute for diversification; constructing a portfolio of uncorrelated assets. When you look at the performance of the 13 most common different asset classes over the last 30 years, you will see there were no years in which all assets performed badly at the same time. During volatile years like 2001 after ‘The Technology Bubble Burst and in 2008 post ‘The Credit Crisis, some assets were able to offset falls elsewhere.
Portfolios ‘drift’ as the various components rise and fall and which can create unwanted risks in a portfolio. Regular ‘rebalancing’ is therefore essential to keep a portfolio on track and aligned to your desired risk profile for your portfolio. This practice can also help the performance of your portfolio over time as, effectively, you are selling parts of your portfolio when they are doing well and redirecting the proceeds to those parts that are in the doldrums, effectively selling high and buying low – a profitable approach I’m sure you would agree.
Diversification and rebalancing cannot completely eradicate risk so a cash reserve is important, a source you can call upon without having to turn to your portfolio in distressed market conditions. This is a particularly prudent practice when regularly selling down from your portfolio to provide a regular income. You can then stop regular portfolio withdrawals when markets are depressed and use your cash reserve pending a market recovery, which will invariably follow in time. This may take a year or two, which gives you an indication of the amount of an appropriate cash reserve.
Investing all in one go could mean you buy just before a market correction. Alternatively, invest over time, ‘dripping feeding’ or ‘phasing’ your investment to minimise the risk of poor market timing.
Psychologists say we feel pain from losses more than we feel pleasure from gains. The temptation is to sell out to stop the pain when markets are falling – which, unless you are very clever at market timing, means that you miss the recovery when it comes. Ignore short term volatility, invest for the long term and stay invested. It is time in the markets rather than timing the markets which counts. If you can’t invest for the long term – do not invest at all.
Author: Paul Newton FPFS, CertPFS (DM & Securities), STEP Affiliate, CertPMI is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022. This article is for information purposes only and does not constitute financial advice which should be sought before any action taken.