Punter Southall Financial Management
Financial Planning Toolkit – ‘Keeping it Simple’
CO-AUTHORED BY CHRIS BEVAN, SENIOR PARAPLANNER
Any investor who is still brave enough to pick up a newspaper nowadays would be confronted by no shortage of issues which could be perceived to impact upon the value of their portfolio.
There is the albeit receding possibility of a Corbyn Government, a growing economic crisis in Europe, and even a 21st century clash of the superpowers in the form of a trade war between the United States and China. On top of all that, there is the ongoing political paralysis in this country over Brexit and the numerous unanswered questions relating to our departure from the European Union.
In such a climate, an acceptance of the potential for volatility is a fundamental part of holding a portfolio of investments. Fortunately, there are wider financial planning steps that you can take to mitigate the impact of this volatility, and you may be surprised at how simple and effective they can be.
A starting point is to maintain a cash buffer equivalent to at least two years’ worth of expenditure. Additionally, an allowance should be made for any anticipated lump sum capital outlay over the same period of time. An example might be a gift made to a child to help them onto the property ladder.
Holding a sufficient cash reserve ensures that there is no need to disinvest monies from the portfolio, should the capital requirement coincide with a market low point.
In a similar vein, you should never be afraid to take advantage of an opportunity to move funds into cash when portfolio performance has been strong, and you know that you are going to need the money in the near future. The FTSE 100 index defied the prevailing mood of uncertainty during the Summer of 2018.
The decision to consolidate gains by moving into cash can be a difficult one. When portfolios are performing well, there is a tendency to want to ‘ride the wave’ for as long as possible in pursuit of further growth. It is important to be pragmatic, though, and also to bear in mind that disinvesting into cash does not mean moving money into your high street bank account and potentially triggering a tax liability. Self-Invested Pension Plans (SIPPs) will always incorporate a bank account which can be used to hold cash in a tax-efficient environment. Individual Savings Accounts (ISAs) and investment bonds will have similar provision.
The part of your portfolio that remains invested will inevitably rise and fall in value over time and the capital is at risk. Diversification across a range of asset classes in a manner which reflects your attitude to investment risk is the best way to insulate your holdings against volatility.
Your attitude to investment risk is not static and will be reviewed regularly by your planning team. It is determined by numerous factors including your personal circumstances and investment objectives. Your risk profile will therefore naturally change over time, but alterations to the level of risk being taken should not be done on an ad hoc basis in an effort to time the market.
It is all very well lowering your risk profile and selling down your equity exposure in advance of a fall in the markets. Assuming you get this right, you then have the issue of identifying the precise point at which markets will begin to rise so that you can reinvest into equities.
Attempting to do this consistently is impossible, and this is why we believe that maintaining a cash reserve is a much more reliable buffer against volatility.
The approach taken to the investment of new money should be similar, and phasing a lump sum into the markets gradually is sensible. However the level and frequency of the phasing should be pre-defined rather than being determined by market movements.
Volatility is inescapable, but fortunately its effects can be mitigated relatively easily through sensible measures such as holding cash and regularly reviewing the level of risk being adopted within the portfolio. There is no need to complicate matters unnecessarily by trying to be clever and timing the markets. Keeping it simple is the best approach.
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