It's time to talk tactics with an IFA if your investment strategy is failing to net the right results
THE volatility of world stock markets over the past six months and the near-collapse of Northern Rock have come as a shock to savers. Even mature economies report fragile conditions.
Now is, therefore, an excellent time to seek investment advice f
rom an experienced and independent financial adviser who can take into account your attitude to risk.
Long gone are the days when clients were asked to tick a box on a risk scale of one to ten to establish which investment was most suitable. Most would probably pick four or five without knowing what that meant. Today, leading advisers use the latest risk-profiling software to help a client. Key factors will be age, family commitments, funding a mortgage and whether saving for retirement or needing to supplement current pension income. There may be specific demands, such as saving for a child's or grandchild's education or paying for a wedding.
Constructing an investment port-folio is like putting a football team together. A different set of skills to tackle planned and unforeseen events ahead is the answer. A new player may help the team rediscover its winning form. It's vital to review assets and tactics. A top-performing fund manager may have moved or a sector previously overlooked may now be appropriate.
Consider what you want your savings to provide, how much you can afford to invest, perhaps contributing monthly rather than in lump sums if paying out of income, and how long it can be invested for.
Don't rely too much on historic investment returns, but use advisers' software to project hundreds of future scenarios to give a better indication of the level and spread of returns.
Be realistic about your expectations. Not every investment can perform in stellar fashion. Diversification means that some savings decline less, such as some dividend-paying shares and fixed-income investments.
By spreading assets, your mix of investments should allow you to stay ahead during the ups and downs of the stock market.
Unless you have a substantial holding of individual shares, the best way to reduce risk is to buy a collective, like a unit trust or open-ended investment company, and to ensure you own three different types: equity, international (as non-UK investments tend to perform well at different times to those here) and fixed income.
For the relatively cautious, JP Morgan's aptly named Cautious Total Return is tipped by Wishart Wealth Management, a noted Edinburgh IFA. This fund is up 6.3 per cent in a year, against a sector average fall of 3.72 per cent, according to Lipper research. The fund aims to beat the return on cash by an average 3 per cent annually over the medium term (three years plus). It is an ideal alternative to bond funds.
Sadly, those who opted for the safety of corporate bonds are probably showing losses in recent years. The UK sector actually shows a 0.26 per cent position over three years. The two stars were UBS Active Bond (up 8.17 per cent) and Rothschild PIC Preferred Income (up 9.19 per cent).
For a really diversified fund with 150 assets which aims for 10-12 per cent annual growth, go for CF Midas's Balanced Growth, says Wishart. It has been jointly managed by Alan Burrows and Simon Edwards since 2002.
Small companies are often the acorns from which mighty business oaks grow. The easiest way to diversify in this sector is to buy a collective fund, rather than invest directly through the Alternative Investment Market.
The UK smaller companies sector has risen almost 28 per cent in three years, with such high fliers as Standard Life's fund jumping 73 per cent and Old Mutual's rising 64 per cent.
European smaller companies combine both the benefits of smaller size with exposure to the economies of Continental Europe. Investors have seen an average 59.7 per cent growth in three years, led by Threadneedle's European Smaller Companies fund (up 78.5 per cent) and SWIP Pan European's (up 78.9 per cent).
For those willing to invest long term (at least five years, preferably 8-10 years) and not be worried by dramatic peaks and troughs, the global emerging markets sector could be the answer. It shows an average rise of 103 per cent in just three years with such stars as JP Morgan New Europe (up 160 per cent) and Baillie Gifford Emerging Markets Growth (up 136 per cent).
Do not have too much of your portfolio – taking property and pension funds also into account – dependent on the UK economy. Last month, the IMF forecast that Britain would grow by just 1.6 per cent, well below 3.7 per cent for the world.
The answer is not to follow a major index like the FTSE 100 or even the FTSE All Share, as they are weighted towards the largest companies which are disproportionately in mining, telecoms and oil and gas.
Instead, ensure an international flavour by opting for one or more global growth funds which have shown an average 35.3 per cent rise in the last three years. Look particularly at Neptune Global Equity (up 110 per cent) and M&G Global Basics (up 87.3 per cent).
The full article contains 905 words and appears in The Scotsman newspaper.
