Looking at investment markets over the last two weeks, it all looks pretty calm out there. Equities are down a tiny bit, long bond yields are up a tiny bit, our portfolios are steady – what’s to worry about?
Without wishing to give them any more publicity than they are already getting, two guys in particular are giving us all plenty to worry about.
Stephen O’Sullivan has written a fantastic piece this week on the Ukraine/Russia conflict and explains what’s going on far better than I could. As Stephen and I noted this morning, so far markets are remarkably calm.
Events like this highlight the risks in our daily lives and to markets. In these days of social media, sound bites. and unrestrained access to our smart phones (whether we like it or not), it is easy for it all to get a bit overbearing.
What should we do about it when it comes to investing? Here are the key ways to manage risk:
Here are the key ways to manage risk:
- Diversification – avoid getting over concentrated in any one share, sector, asset class or currency
- Due diligence – make sure you know exactly what you own and the key risks that impact that investment
- Price bubbles – try to avoid price bubbles that could pop resulting in significant long term capital loss
- Forced selling – make sure your cash needs aren’t going to force you to sell investments in the immediate aftermath of a market sell off
- Match risks to investor tolerance – make sure you are comfortable with the risks implicit in your investments
When it comes to investing, risk is inherently a good thing, not a bad thing. It is the presence of risks and the failure of some investors to deal with it that present investment opportunities and risk stops markets getting overheated.
The good news is that of the above list of 5 actions, you can rely on Tideway to cover off 1, 2, and 3. In fact, in times like this this is what we focus on; we lift the bonnets on our funds, dig around and look at what we own, make sure we aren’t over concentrated, and stress test our portfolios for scenarios that might unfold. Our funds are not picked on last year’s winners. They are carefully selected to create diverse portfolios and avoid price bubbles. On this subject, Nick Gait today looks at one of our ‘go-to’ fund managers, Artemis, in more depth below.
On 4 and 5, we need your input to get it right. We need to know when you are going to need money from the portfolios, how much and how frequently, and we need to know your tolerance to any short term down turns and whether they would impact your lifestyle – we don’t want this to happen. You can take it as read that we know all your money is important and that you would prefer not to lose it in the long term!
It's all in 5
This brings me on to a particular bug bear of mine, which is how many wealth managers and financial advisers deal with this. Risk management should be equally about investment time frame and investment task rather than solely your attitude to risk as a client. It is our job to work out the cash flow time horizons and give you the best risk adjusted return investments for your particular investment objectives which are then tested against your attitude to risk.
For those of you fortunate enough to have multiple accounts with us, such as ISAs and general investments accounts as well as SIPPs, we should be asking whether all this money is for the same purpose? Where will you go first to access income, or cash that you may need in an emergency? This, along with the way tax impacts our savings, should tell us broadly what investments you should hold. In most cases, it’s unlikely to be the same answer for all the different accounts.
This is also why we have introduced our ‘dual accounts’ for SIPPs to allow us to make that distinction between short and longer timeframe funds. It is entirely correct to have more risk in the long-term account and less in the short-term account, to optimise risk and returns. Once you have made that distinction with your adviser, we can manage the money appropriately.
As one of my financially sophisticated clients said to me yesterday, “you know it’s not like this with most wealth managers and advisers, James. With most firms you get risk scored during the onboarding process, often by the relationship guy who is less investment savvy than you might expect, and then that’s what you get in all your accounts!”.
It was brought home in an interview later yesterday afternoon. Whilst the interviewee described his firm’s portfolios scored 1 to 10 for risk, I dug a little deeper. So, who goes into 1 and who goes into 10 I asked? “Well actually no one goes into 1-3 and no one in 7-10, actually it’s all in 5.” “Really?” I asked, looking and smiling at me as he knew where I was going, “No it’s all in 5!”.
A new approach to pension drawdown
Finally, we have just published a piece titled ‘A New Approach to Pension Drawdown‘ in answer to the recent change to bring pensions into inheritance tax which we hope you find useful.
If you have any questions about the risks implicit in your investments with Tideway, how we look to manage them, or want to update us on your cashflow needs and objectives do get in touch with your wealth manager. We are here to help.
