As another Bank of England monetary policy meeting approaches some economists are predicting that it will raise interest rates to 5.5%, while a minority expect even steeper hikes. All of this means that the uncertainty about how much the economy is going to grow, and more volatile stock markets is set to continue.
Given that we have had a decade of low interest rates and low volatility, the challenges posed by ups and downs in the markets are unfamiliar to a large tranche of investors.
Private investors saving for their own secure future would be excused for feeling concerned about the security of their money. So how can you remain confident about having money invested through such uncertain times? The key lies in building a portfolio that’s robust – and diverse enough – to weather any storm.
A well-diversified portfolio is a must if you want to protect your investments against market falls. By investing across a variety of different asset classes — stocks, bonds, cash, or others — sectors and regions, you can spread the risk much wider than when if all your investments are concentrated in a single area. This means your portfolio is better positioned for different market cycles and conditions.
Attitude to risk
There is no one-size-fits-all approach. Indeed, choosing asset classes will depend on your attitude to risk. A cautious investor might have a portfolio containing fixed securities such as gilts, bonds and property, for example, while a more adventurous investor is more likely to have a mixture containing a higher proportion of equities, including the likes of emerging markets, as well as alternative investments such as property.
There are many sectors to choose from. UK equity income funds are hugely popular. But don’t get carried away. If you hold too many you run the risk of a high overlap of holdings. That’s because many of these funds tend to hold the same big, blue-chip names, and so if a dividend cut does happen these funds may bear the brunt and you will be over-exposed.
There is another sector worth looking at if capital preservation is your number one aim. Targeted absolute return funds aim to grow your fund in real terms as well as seeking to protect your capital. But this is by no means a guarantee and some funds in the sector have come under fire for not delivering on performance promises.
Income
If it’s income you want, then don’t forget to look at different types of investment vehicles. Investment trusts can deliver a steady income to investors, even in times of crisis. This is because they are able to hold back 15% of their dividends each year, to top-up payouts in difficult years. That means that some have very long records of raising dividend payments year in, year out.
It’s also important to look beyond investments on home soil. Stock markets around the world behave differently, so holding different equities globally will help diversify your money further. Global funds will come with currency risk, however.
Whatever the outcome of all the uncertainties on the horizon, it’s important to remember to take a long-term view and try to ignore the short-term noise. Stock markets are unpredictable at the best of times — and can move sharply in both directions. As long as you have a well-balanced portfolio you should be able to handle any market conditions. For long-term savers there will be plenty of time to ride out any short-term losses and see the value of the investment recover.
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Photo by Eric Prouzet on Unsplash
Photo by Thomas Ashlock on Unsplash
