The value of your investments and the income from them may go down as well as up, and you could get back less than you invested.

Tip the balance in your favour

3 min read
Rory Bennett, Private Client Manager20 Oct 2020

The majority of my clients have made their wealth through hard work and are seeking a safe and steady investment.

This predominantly requires a balanced portfolio. There are hundreds of balanced investment products available in the UK – all of them offering a mixture of equities, bonds and other investments (often called alternatives). But there are lots of different interpretations of what a balanced portfolio actually looks like. Ben Kumar, Senior Investment Strategist at 7IM, looks at some of these investment interpretations in his article, ‘A Balancing Act’.

For individuals baffled by the number of choices, here are some of the key points you should think about when looking at balanced portfolios.

First, you need a financial plan. You have to know what you want before you can work out how to achieve it – you wouldn’t set off on a journey without a destination in mind. In a recent FT article, ‘How to prepare financially for the unexpected’, my colleague Michael Martin, Private Client Manager at 7IM, bangs the drum for long-term financial planning, and outlines the fundamental points to consider. When making an investment decision you should only invest if the strategy objectives are aligned with your own, and there is a specific need for the type of investment being made.

Secondly, how much risk are you prepared to take?

The wealth management industry groups portfolios with a medium level of risk, and classifies them as balanced portfolios. However, this does not mean they are all the same. Balanced portfolios largely consist of equities (the higher risk component), bonds (the lower risk component) and other investments (alternatives). Equity allocation varies from manager to manager – some portfolios have less than 50%, others have upwards of 60%. Always make sure the particular risks of a portfolio are understood and ensure they contribute to your overall goals – you shouldn’t take more risk than is necessary.

Is your portfolio diversified enough?

If you want to protect your life savings, then don't put all your eggs in one basket – that's the basic premise behind diversification. At 7IM, we aim to blend different types of investments from all over the world to balance the risks appropriately – to complement, as well as diversify. Markets and economic conditions evolve making markets hard to predict. Interest rates are at record lows and returns on government bonds are minimal. For this reason 7IM holds a core position of other investments (alternatives) in our balanced portfolio, which is a key differentiator relative to competitors. We favour hedge fund style investments over traditional alternatives such as private equity, gold and commercial real estate. One example would be a commodity strategy that benefits from changes in commodity prices and returns are not driven by the equity markets. These types of investments form part of a diversified portfolio and often help protect your life savings in times of market stress.

With the global economy battered by COVID-19, it is now more important than ever to focus on investing in the right industries rather than geographical location. Ben Kumar touches on this in his article, ‘Asking the right question: What is the business, not where is the business’. As an example, one of our key themes is the ageing world population. For this reason we have a position in a healthcare fund within our balanced portfolio.

As ever, with any financial plan and investment strategy, it is important to focus on the long term. Don’t waste time focusing on variables that are uncontrollable over the short term, like the trend of interest rates, Brexit, COVID-19 or the value of the stock market. Instead, focus on setting up a financial plan and constructing a diversified portfolio.

It is not easy to compare one balanced portfolio to another or whether the risk and diversification are appropriate to your needs. If you are uncertain whether a particular investment or plan is right for you, or need help working out what you should be aiming for, have a conversation with a professional adviser.

Get in touch with us today on 020 3823 8678, or email talktous@7IM.co.uk

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