In the light of recent market volatility, we felt that it would be worth restating how we invest your money and to remind you of some of the beliefs that underline the BRB Investment Process.
In order to have a successful experience as an investor, it remains our opinion that we need to ensure that you do various things –
Ensure that you have sufficient money in cash deposits for your short-term needs
This means that, should investment markets go through difficult times, you are not forced to sell your investments and can simply draw from your cash deposits.
Ensure that you are not exposed to more risk than you can tolerate
Before making any medium to long-term investments, all of our clients complete a detailed risk tolerance questionnaire in order to work out the maximum level of risk that can be tolerated. We run through and explain long-term data from 1970 to 2011, stating the worst losses that would have been experienced over that period based on different levels of risk.
We then restrict exposure to volatile ‘growth’ assets to an appropriate percentage of the investment port folio. The remainder of the portfolio is invested in steadier ‘defensive’ assets. These defensive assets act as risk reducers and lessen the impact of market falls.
It is worth mentioning that, when market falls are reported on the evening news, they report the change in the FTSE 100 index (i.e. the 100 largest companies in the UK stock market). This could lead you to believe that your investments have fallen by more than they really have.
As you have an exposure to ‘defensive’ assets and your ‘growth’ assets are spread across global stock markets, it is likely that any losses will be less than those reported on the evening news.
We appreciate that no-one ever wants to lose money within their investments but, by correctly assessing your tolerance to risk, we give you an acceptable level of risk.
Avoid ‘tactical’ investing
Many advisers recommend investing on a ‘tactical’ basis whereby their clients will be advised to alter their weighting between different types of investment based on the advisers view of current market conditions. The intention would be to gain an advantage by actively trading the portfolio.
A huge weight of academic evidence proves that this kind of tactical investing will damage your wealth rather than add to it. The main reason for this is that no-one can predict the direction of investment markets or pick the next ‘hot investment’ on a reliable and repeatable basis.
Ignore the financial pages of the newspapers!
The temptation is to believe the newspapers when they tell you that ‘this time is different’ when, in reality, it is unlikely to be the case. We have experienced turbulent times before and we will experience them again.
Whilst we are not claiming that the current economic situation is not serious, we have no reason to believe that markets (and the world for that matter) will not recover in the end.
Newspapers have to sell newspapers! The guidance that they should be giving to investors would involve writing the same article week in, week out and would repeat the points made in the article you are reading now. After a while, they would not sell very many newspapers at all!
Stick to the strategy through good times and bad times
We recommend adopting a sensible, long-term strategy based on hard evidence and for you to ‘stay the course’ through difficult times.
This involves an acceptance that investment markets will rise and fall in the short term but, as long as you are taking no more risk than you can tolerate and you have sufficient money in cash deposits for your short-term needs, there is no need to react to short term losses.
We have long term data for all of our portfolios and your BRB adviser will be happy to talk through this data during your next review meeting. This should provide you with the reassurance that you will receive the long term returns that you require.
Of course, should you wish to discuss any aspect of this article, please contact your BRB adviser.