Investments  

How to protect a client's portfolio in uncertain times

  • Describe the economic challenges at present
  • Identify the right kind of products to be invested in at present
  • Explain why these products are suitable
CPD
Approx.30min

This is bringing precariousness.

Remember the S&P 500 plunged by nearly 7 per cent last year from the first week of May to the first week of June, before recovering strongly.

In the UK, the FTSE 100 saw its value fall by 5 per cent last August, the biggest monthly drop in nearly a year, and a whisker away from its worst losses in four years. 

Central banks have not stood still as risks rise.

Monetary policy is becoming more accommodative.

In the US, the Federal Reserve has moved to cut interest rates twice in 2019, while the ECB cut its bank deposit rate to an unprecedented -0.5%, and has resumed quantitative easing to stimulate growth.

The flipside to this action is that yield remains hard to find, especially in fixed income assets.

When we consider the impact that inflation has on eroding returns, negative yield in these types of assets can pose a significant problem for HNWs looking for income to support their lifestyles, and yet manage their risk appropriately.

The same is true with cash; a natural reaction to market instability might be to allow the cash balance of a portfolio to drift up significantly.

However, with savings rates often lower than inflation, this will also see assets dwindle in real terms in the long-term. 

Against this backdrop of uncertainty and change, it is important that HNW investors are not complacent.

It is crucial to ensure they have the right investment strategies in place that will perform through periods of turbulence as well as through the good times, while also protecting their portfolio against inflation.

It is vital that they pay particular attention to their succession planning strategies, in order to ensure their wealth is best placed to grow whilst also being protected and preserved for future generations.

Diversification delivers a smoother ride for investors

Not placing all your eggs in one basket is one of the most heavily cited adages in investment, but it is all the more pertinent at present as investors look to manage risk. 

Diversification is a core part of modern portfolio theory; by investing in a variety of assets, high net worth investors should be less exposed should one particular sector, country or asset class bear the brunt of a downturn.

A broad range of assets should also help reduce volatility of annual returns, providing a smoother road for investors in times of upheaval in the financial markets.

This is extremely important for HNW investors that frequently sell down their holdings to fund their lifestyle, meaning they are less likely to sell during a pronounced dip in capital value.

This diversification could include non-correlated assets, whether bonds, commodities or alternatives such as property and private equity.