How to build an 'all-weather' portfolio for every outlook

Chairman of the Clarion Investment Committee and chartered financial planner Sam Petts shares his insight into investment strategies and wealth management, particularly in a time of turmoil.

In a post-pandemic world, what should wealthy individuals – or even those with extra money having sold a business for example – be investing their money in?

It is important not to put the cart before the horse when it comes to investing. Before you even start to look at investing any money, you need to consider what you are investing for (your financial plan) and the tax wrappers you’ll use to help you do it.

As lifelong financial planners with a long history of specialising in advising business owners, Clarion tries to put its clients in a position where they have little ‘forced income’ (e.g. unwrapped property income, dividends etc) after the sale of a business. This then allows them to legitimately take advantage of the various tax exemptions and allowances (e.g. Capital Gains Tax allowance), which in turn allows them to withdraw funds whilst paying minimal, or even no, tax.

To be clear, we are not talking about aggressive tax planning. This is just the product of financial planning done well and utilising mainstream tax wrappers such as pensions, ISAs, onshore and offshore bonds.

Once the financial plan is in place, we would always suggest to any client that they keep aside emergency cash savings, typically to cover between 6-12 months of regular expenditure.

Once that need is met then a regular investment into a diversified portfolio of global equity funds would likely stand them better than holding it all in cash, assuming they are investing for longer than 5 years. This approach has withstood wars, depression, and numerous crises over the past 100 years.

If you are investing regularly, then you not only get into the mind-set of setting money aside but you also take advantage of any market dips through pound-cost averaging (buying assets when their price is low) and this will benefit you over the longer term.

If you can do this in a tax-efficient manner using the right tax wrappers, then the favourable tax treatment means that returns should be even greater.

Should you look at conventional asset classes like bonds and property, commodities like gold or stocks and shares?

A lot of our clients have a lot of exposure to property through their own main residence and perhaps an additional buy-to-let property or two.

The outlook for the commercial property sector is a little bit mixed because of significant worries regarding vacant offices and retail units in city centres. Covid-19 has shown employers that many of their staff can work successfully from home and, understandably, executive teams are now looking at whether they need to be paying a small fortune on a city centre location.

There may still be some opportunities within the commercial property sector, but it is important to pick the right sub-sector. For example, logistics companies appear to be doing well and ‘big-box’ warehouses are still in demand so that sub-sector is quite buoyant.

Over the medium to long term, history tells us that holding too much in cash is likely to erode your savings in real terms (adjusted for inflation). We believe this to be the case at the moment as interest rates are at historical lows and the outlook for inflation is that it is expected to rise.

A 10-year government bond (gilt) is currently yielding only about 0.25 percent per annum. This demonstrates the market’s expectation that we will be in a low interest environment for at least the next decade. As an asset class, we do not find gilts particularly attractive and would prefer to invest into assets which could provide real returns (above inflation) such as global equities.

Commodities can be quite volatile due to the many inputs that affect them. Because of the low-interest environment and negative real yields (below inflation) seen around the world, gold has done well recently. Central banks around the world continue to provide stimulus to economies so if this feeds through into higher inflation, as expected, then we expect gold to continue to do well. However, gold is not without its risks and can be extremely volatile; it should therefore only play a small part in an investor’s portfolio and primarily for diversification purposes.

How do you build an all-weather portfolio and what is the advantage of appointing a wealth manager?

The main advantage of appointing a wealth manager/financial planner is to help you understand the reasons why you are investing, counselling you to hold your nerve when markets fall and not to get too greedy when markets are rising quickly. As the old saying goes, it is time in the markets rather than timing of the markets that’s important.

This year is a great example of this. Many investors were understandably very nervous when their investments fell by 10, 20 or even 30% in the matter of a few weeks. Those clients who listened to their wealth manager who told them to keep their nerve have now recouped most or all of those losses. Those clients who sold down to cash (to avoid higher losses, presumably) are now significantly down and it will be very difficult to recoup these losses without taking extra risk.

In terms of constructing an ‘all-weather’ portfolio, the key is diversification – don’t have all your eggs in one basket.

If, for example, you had invested in a FTSE100 tracker or some popular blue-chip UK listed names then you may be nursing some losses year to date because that index has not done too well.

However, if you had also invested into a US market such as the S&P 500 then you would have done a lot better. Going a step further, if you had invested into the technology-focused Nasdaq then you may even have made significant gains due to the Covid-19 situation (think Zoom).

It is important to diversify investments across the various asset classes and geographical regions to protect you from over-exposure to any one area. The amount allocated to each area depends on the amount of risk you are willing and able to take; for example, an investor who is able to take more risk may have more in emerging markets than a cautious investor.

It is important to realise that it is the asset allocation (rather than stock selection) that is the primary driver of investment returns. Having exposure to a market is more important than the specific stocks in that market.

Different asset classes grow and fall in value at different rates so, after a period of time, your portfolio will look different to how it started out. For example, let us take an investor who invests in two different asset classes in equal proportions (let’s call them A & B).

After three years, let’s assume A has grown by 20% and B has fallen by 20%. The overall value is still the same, but A now represents 60% of the portfolio and B represents 40% of the portfolio; this is a fundamental change in the portfolio’s risk profile from when it started.

It is important to periodically rebalance the portfolio to bring it back in line with the original risk profile. A good wealth manager will help an investor in this discipline and get them in the habit of selling when prices are high and buying when prices are low – one of the key cornerstones of investing.

They will also keep abreast of changes in the legislation and articulate to you how this affects your financial plan. This then may necessitate a change in strategy.

What have been the experiences of wealth managers helping people during lockdown?

We have been particularly busy with existing clients and also new referrals, which is a direct result of people having a lot more time at home to focus on their finances and plan for the future.

Covid-19 has led many people to start asking questions about their future and some clients may have decided they are going to retire early or sell their business now rather than in five years’ time.

Clarion has been able to demonstrate to clients what amount of money they need to continue living the life they want to lead for the rest of their lives and visually demonstrate to them that they can afford to retire now, as time is much more valuable than money.

For business owners, this has galvanised many into finding a purchaser at the price they need rather than hanging on needlessly for a higher price. Clarion has previously commissioned a study (https://clarionwealth.co.uk/enough-now/) into the psychology of selling a business and many owners wish they had sold earlier than they did.

But, other than that, there has been no real change in the way we operate during lockdown, it has been business as usual but with a lot more online meetings.

Contact Sam Petts to book a free initial consultation meeting at [email protected] or +44 (0)1625 466 360 which is backed by our Clarion Guarantee. If you are not completely satisfied with the value of the service you have received after the fourth meeting, when you receive your written financial plan, we will waive all fees.

How to build an ‘all-weather’ portfolio for every outlook