Introduction
There are detailed notes on building and reviewing portfolios in other places on this website, built in training sessions with a variety of people, I find myself very often stressing the same points that are in my opinion fundamental to long term success in meeting investment objectives.
I have listed 10 to start with because that seems to be a tidy number: the first few are the most important. I may expand the list from time to time, so if there are more than 10 items, that will be why!
Essentials
- In a diversified portfolio, at any point in time, some investments will not be doing so well as others. If that were not the case, there would be no useful diversification! In fact, the best ‘insurance policy’ holdings in a portfolio may make virtually no money, or even lose money, for years. That cost is the ‘premium’; you get to claim when everything else is suddenly out of fashion.
- Past out-performance, especially if it includes sharp bursts of growth, is often just because the fund manager got lucky. Consistency of performing above average relative to an appropriate peer group is more important than being top of a list over 1 or 2 periods.
- If you are using your portfolio to give you spending money, you MUST sell to bank profits (even if that means paying tax) when your holdings do better than your planned growth rate and reserve the money for later when things may not be going so well. To be able to bank profits regularly, you need to have a range of different assets, not just a single multi-asset fund.
- We all make mistakes. If you pick a fund for the right reasons but maybe at the wrong time, sell it at a loss. Waiting for it to recover to save your pride will mean you lose out on other opportunities.
- Liquidity is important – you need to know that when you want money to spend, you will be able get enough without selling investments at the ‘wrong’ time. Having a liquidity reserve of 3 times your annual budget is a good rule of thumb.
Nice to know
- Currency matters. Unless you pick a specifically ‘hedged’ share class, your returns in Sterling will be better if the Pound falls, and vice versa, from your non UK funds. You need to take a long term view (I would usually be negative about the Pound most of the time because the UK has a large balance of payments deficit all the time) and when buying, you need to also adopt a short term tactical view. In other words, is the Pound currently high or low relative to the native currency/ies of the investment?
- Asset allocation is very important and some general rules are well known and also tried and tested, but never forget to think about the here and now when making new purchases . Fixed Income investments are a good way of diversifying risk from equities over the long term, but buying them at record high prices (ie when interest rates are at record lows) is not prudent unless you propose to trade out again in the near future because you expect rates to be even lower!
- Good results often come from investing with young fund managers starting new funds, but they almost always run out of steam/get ‘fat’ and lazy (choose your own phrase). This is because eventually the world notices they are doing well and money piles into their funds. That probably makes them personally rich and less driven and the funds harder to manage. There are occasionally exceptions.
- The world changes subtly over time, so asset mixes should change too. What was an emerging market in 1995 (eg South Korea) may be an investment destination that is very mature and with less opportunity 25 years later. On the other hand there is a saying that being a pioneer is risky: you either run out of food or get shot by the natives! The trick is to invest in long term trends as they begin to become mainstream – they may then run for decades,
- Market timing is impossible to get right, as readers have no doubt been told many times. However, that is something of a cliché. It does not mean you stop applying common sense. At times it is obvious that investments are getting to ambitious valuation levels and selling out at least to take profits is a very valuable discipline, as would be cautiously staging purchases from cash destined for long term investment, or even sitting on the sidelines with the cash and waiting. One can also at times see assets that are out of fashion for reasons that are only temporary (eg the UK and Brexit), so might be better value, again offering a phased investment opportunity. Buying and selling in a profitable way without looking for absolute peaks or troughs is entirely feasible with a little experience and some regular checking of portfolio progress.
- Portfolios can have different ‘shapes’. Depending on your objectives and the state of the world, you might opt for a geopraphically diversified portfolio with 2 or 3 asset classes like equities, bonds and alternatives, or a core/sattelite portfolio with funds focused on different market segments, or a barbell approach with a block of higher risk equity funds balanced by a large reserve of cash and very low volatility alternatives. These are well known options – there are others and you can customise your won. The importat point is to check out the correlations and potential for volatility whenever you build up or alter your asset mix.