When markets are volatile, follow a process
What a week it was for the investment markets! Turmoil fuelled by fear and the contagion of fear.
No one ever enjoys seeing the value of their pension or investment funds fall but it is an inevitable fact of life that investments can go down as well as up and that you might not get back as much as you invest.
These “risk warnings” are there for a reason.
At Informed Choice Ltd our clients invest for the long-term.
Yes, when the FTSE 100 index of leading shares falls 4.7% in a day, the value of our clients investments fall as well. But (and it is an extremely important but) we don’t have any clients who are wholly and exclusively invested in UK shares.
Indeed we don’t have any clients who are entirely invested in shares full stop. Whether those shares are in the UK or indeed in various countries around the world.
Our clients are invested in a range of different asset classes – in other words, they are diversified.
I always think that diversification is the posh word used by investment professionals but al it really means is what my Mum used to say “don’t keep all your eggs in one basket”!
At Informed Choice we have an investment advice process that is core to the way we advise our clients. This investment process is made up of just six key steps;
1 – Investment isn’t a stand alone thing. It needs to be closely related to the Financial Planning goals and objectives that our clients have. Knowing what those goals and objectives are tells a lot about the degrees of risk that the client might need to expose themselves to. Knowing those goals and objectives also tells us how much growth is needed (and how much risk that requires)You cannot invest money unless you know what you want it to do.
2 – Every human being is unique that almost goes without saying. Each of us has a different attitude towards risk and reward and towards the volatility that comes with investing money and therefore the potential for loss as well as gain. We need to understand how our clients feel about that subject. It is just too easy for how we feel to take over and that is not good enough. As well as us understanding risk we need to ensure that our clients understand this as well. This is about communication in plain English whether spoken or written.
3 – Asset allocation drives investment. Having cash, fixed interest, commercial property and shares in a portfolio makes real sense. Not having too much of any particular asset class makes even more sense. They can all fluctuate in value, even cash if you think about it because, it can be spent, it can be eroded by inflation and it can be eroded by taxation (on the interest) so never think that an investment can never go down in value that is dangerous thinking. At some times one particular asset class may be going up in value whilst another may be falling. Sometimes they all rise or fall together at the same time. A good mix of asset classes protects a portfolio against the worst of a downside and is probably the biggest single contributory factor to rewards achieved.
4 – Changing the asset class mix what we call tactical adjustments is a key part of our investment process. These changes tend to be quite small steps because we simply don’t believe that anyone can really time markets all of the time. An asset class mix that is tactically adjusted from time to time tends to make sense.
5 – Only once we have done the asset class modelling do we then go onto select the investment funds that we are going to use to match the model. A Financial planner simply cannot select the best investment funds until they have done the necessary modelling and built the asset class model
6 – And then our sixth step is to review, review and review again. I was talking recently to a client for whom we have been providing investment advice about his pension fund for nearly 20 years. He was telling me that what stands out in his mind is the review process. Some years have been bad and some good. Some very bad and some very good indeed. However our process always protected him in those bad and very bad years from the worst of the downside and importantly it has enabled him to achieve his Financial Planning objectives.
We think it is a good process and, most importantly, it delivers consistent and expected results for our clients.
Photo credit: Flickr/hounddiggity