A successful portfolio is defined by whether it achieves the individual's personal objectives. But no matter the individual, the success of a portfolio always falls down to the fact that we, in the role of the financial adviser, have got to make our clients more money than they would make from their existing pension or in National Savings.
So, in any portfolio, the same questions have to be asked. Where are we going to find this performance, and how efficiently can we create it? This article will help you understand what makes up a successful portfolio and how we can minimise losses and maximise gains.
A successful portfolio always comes down to the mitigation of risk through diversity of asset classes and geographical regions. David went into much detail in his recent blog, 'How To Beat The 2020 Stock Market,' so you can read up on this in more detail.
In a nutshell, when it comes to diversification, there are four main asset classes:
- Fixed interest
- Commercial property
It's worth spreading your money amongst all of these because while equities traditionally have made the most money over the longer term, they are more exposed to the stock market's ups and downs. In the global market drop of the pandemic, no equity was safe, yet our clients' fixed interest pretty much stood still, and their commercial property funds went up!
That's why diversification is essential. A successful portfolio has access to all of these different asset classes, and a good adviser will be able to move funds into various asset classes to keep your funds safe.
However, being able to diversify into different asset classes isn't enough to build a successful portfolio alone. You should also look to split equities between the UK market and other international markets.
Let's call these international assets 'global equity'.
Global equities can be from anywhere abroad but are typically made up of US, Asian, and emerging markets like Brazil and Russia. So, having funds in global equities is an excellent way of benefiting from stocks worldwide when there is a downturn or when the UK market struggles. It means you may still outperform the stock market and mitigate risk
Look at what is good value
As important as it is to a successful portfolio, diversification still depends on buying value within the funds. It's crucial to be constantly aware of both the best and worst-performing stocks when making a buying decision for your portfolio.
Don't necessarily be put off by a fund's poor past performance; instead, look at its potential value. Because history has shown that markets have always recovered. If there is a poor performer in your portfolio we would always speak to the fund manager who is far more interested in its long term performance than how it performs over three to six months. We've seen some poor performers over twelve months blow the doors off competition once their shares come home to roost!
Always try to approach investing with a pragmatic rather than an emotional mindset.
Don't get emotional
Making emotional decisions may be the worst thing you can do in an investment.
The best performer of last year may not perform this year, and although it would be tempting to invest heavier in it, it's not always the best move. Additionally, last year's worst performers shouldn't be sold just to cut a loss. They may well become high performers down the line.
So, yesterday's winners aren't necessarily tomorrow's winners. That's why you need to make sure you are to help you navigate these risks effectively.
High risk does not always mean high performance
Managing risk is a crucial part of building a successful portfolio. Some people prefer to have very little market exposure, while others set risk levels that can set your hair on fire!
For my clients, the funds that have made the most money tend to go hand in hand with the biggest risk. Our 10 out of 10 portfolios usually outperform our 6 out of 10 portfolios over the longer term.
However, high risk doesn't always mean high performance.
That's where a good independent adviser comes in. Quite often, whenever we compare existing portfolios, we've produced the same or better returns, having taken less risk. So our 6 out of 10 portfolios have sometimes outperformed other portfolios that have had 10 out of 10 ratings!
It's the adviser's experience and the diversification of the portfolio that makes all the difference.
Be prepared to accept loss
That doesn't mean our client's portfolios are a series of constant wins. You have to accept the world as it is when it comes to building a successful portfolio. A fund over 10 years will always have its good and bad years, and the most successful portfolio accepts that there will be losses to create future years of growth.
You've got to be able to create a portfolio that is diverse and robust enough to ride out the worst times and capitalise on the good times. The world is always going to generate times of crisis. History repeats itself.
Set up to ride out the bad times
But bad times don't always happen every year. In between these years, there are times of growth. Big companies like Apple, Amazon, Vodafone, and Shell pump up the markets, so there will always be growth opportunities after a decline.
If you don't accept that inevitable downturns are realistic, however, and if your portfolio isn’t set up to ride out those bad times, you expose yourself to unnecessary risk. I've seen this happen a lot during the years before the pandemic.
Personal investors without an adviser made some great returns during that period of growth after the 2007 credit crunch. During a crisis like now, many of the very same people are left overexposed and making significant losses in record-breaking time.
What will happen tomorrow?
That's where the sophistication of a successful, diversified portfolio shines through. We have ended up taking less risk with our clients and still producing very decent returns by looking at how we dealt with past downturns.
In fact, our portfolios have performed exceptionally well against the markets recently. That's the difference between working with a good adviser and just reading the pink pages or browsing the web. It's about using an advisers’ infrastructure and knowledge of the market to help answer the golden question that many don’t know the answer to.
What will happen tomorrow?
It's impossible to know for sure, but we can aim to lose as little as possible during the downturns while still making money when the markets go back up. That's the key to a successful portfolio, making long term gains without taking enormous risks.
So make sure you are diversifying into different asset classes and geographical regions and keep a pragmatic mindset when it comes to making decisions. And above all, make sure you use the experience of a good independent adviser to help you.
I hope this was useful. Feel free to email me for any further information at firstname.lastname@example.org.
The views expressed in this article are those of the author and do not constitute financial advice. Applewood Independent Ltd is authorised and regulated by the Financial Conduct Authority. For financial advice designed for you and your specific circumstances, please contact the author using the contact details provided in this article, or alternatively contact the Applewood Independent Ltd office on 01270 626555.
The value of an investment can go down as well as up. Past performance is not a guide to future performance.