Lowes Magazine Issue 123


Dealing with portfolio risk

concentration risk in a portfolio. At the same time, people tend to be influenced by what has happened in the markets in recent years – this is termed recency bias, which can affect decision making. So, how do we now position portfolios to deal with this and so create more resilient portfolios? Key is to diversify the investments used and so the risk in the portfolio. Diversification is holding different investment styles and strategies which do well at different times. The equities/ bond split is a form of this and there are still places for both in portfolios. As Independent Financial Advisers, diversification has been a key strategy of Lowes over our entire history. In addition, we have the advantage of having a specialist, expert, in-house investment team looking after our clients’ portfolios. They are monitoring the markets on a daily basis and identifying the investments which can offer the best returns as well as those that can spread risk within portfolios, because as well as finding the best funds, sometimes you need investments that offer an element of protection as part of that risk diversification. Structured products are a good example, having an element of capital protection built in, and we have been using them successfully to diversify client portfolios for decades now. When it comes to investing, one thing we do know is that we don’t know what is going to happen other than that there will be change. Preparing our investment portfolios as best we can to weather the storms and make hay in the sunshine, is what we must do to help our wealth building strategies.

ONE OF THE CURRENT DISCUSSIONS IN THE financial services industry is how to invest in an environment where the traditional correlation between stocks and shares (equities) and bonds (fixed interest) investments has broken down, potentially increasing risk within portfolios. When investing for a balanced portfolio, traditionally, a 60% equities 40% bonds portfolio was considered a reasonable split to help achieve long-term results, as equity and bond pricing tend to be uncorrelated, i.e., they don’t act in the same way to market conditions, so if one goes down the other goes up, to a greater or lesser degree. Also, the greater risks of stock market investments to some extent can be offset by the steadier, fixed interest payments from bonds. Now, the typical pairing of equities and bonds is no longer delivering uncorrelated returns. This is not the first time we have seen equities and fixed interest investments become similarly correlated, it happened as a result of the Financial Crisis in 2008/09, for example. The concern for investors is that from 2011 until now the markets have experienced generally rising prices, with occasional setbacks, and many investors and also many people within the industry, have not experienced this lack of correlation before. Of late, investors have been chasing growth stocks or using index tracking investments, both of which benefitted from the upward price motion of a handful of stocks that have been pushing up the indices. Technology stocks were examples of this, until a short while ago. The danger here is that it creates

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