As most long-term investors know, investment markets have their ups and downs. The downs are usually associated with periods of uncertainty, perhaps due to political or economic factors or even natural disasters.
Uncertainty leads to volatility – more extreme movements in asset prices – which can greatly impact portfolio values. This can be of particular concern if you are close to retirement and preparing for your last payday. So, what can you do about it?
If you are building wealth in preparation for retirement in wobbly times, there are some options:
Over the long term, shares have produced higher returns than fixed interest, though with greater volatility. The difference in returns between shares and fixed interest is called the “equity risk premium” or the reward for taking on the extra risk. In the past, the difference has been 5-7%.
When investment volatility is high, shares tend to be the hardest hit. But while it is tempting to sell shares in a falling market, this robs investors of the opportunity to ride the upswing when markets recover.
It is possible that better returns may be found amongst the ‘boutique’ managers who are not constrained by huge fund size and/or manage their funds on an ‘absolute return’ basis rather than simply trying to beat the investment sector benchmark. This requires smart investing, not just following the pack.
Fund managers have traditionally held a significant proportion of investments in blue-chip company shares. Whilst they tend to pay consistent dividends, there may be other opportunities for faster growth. These include smaller companies (or small caps), unlisted shares (private companies) and overseas shares in less developed countries (emerging markets).
Apart from shares, higher-yielding debt instruments offer the potential for even higher returns but at higher risk.
The key to investing in these areas is good research – identifying sound opportunities and eliminating those with unacceptable levels of risk. Of course, the supply of “good quality, relatively safe” investment opportunities may appear to be limited when things are uncertain. Some fund managers offer products specialising in a wide variety of assets.
Good investment management requires talented people and sophisticated systems and strategies. Organisations with these attributes have a better chance of identifying under and over-priced securities and markets. By moving money between countries, currencies, sectors, and asset classes, these managers aim to produce higher returns. Funds managed according to an “absolute return” philosophy are an example of where managers aim to produce above-average returns in rising and falling markets.
When selecting a fund manager, always pay attention to the fees charged, which can impact the overall return on your investment. Sometimes they may even offset the larger returns made on the investment itself.
It is important that before you make any rash decisions, you give us a call so that we can develop a plan specifically to suit your needs.
The purpose of this website is to provide general information only and the contents of this website do not purport to provide personal financial advice. JourneyNest strongly recommends that investors consult a financial adviser prior to making any investment decision. The contents of this website does not take into account the investment objectives, financial situation or particular needs of any person and should not be used as the basis for making any financial or other decisions. The information is selective and may not be complete or accurate for your particular purposes and should not be construed as a recommendation to invest in any particular product, investment or security. The information provided on this website is given in good faith and is believed to be accurate at the time of compilation.