How does one build an investment portfolio for the future?

This article is part of
Guide to advice after the pandemic

How does one build an investment portfolio for the future?

The UK is on course to enter a deep recession.

GDP fell 2 per cent in the three months to March - the fastest fall since the 2008 financial crisis, with analysts forecasting as much as a 15 per cent contraction in GDP in the second quarter of this year.

As explained by William Ryder, equity analyst at Hargreaves Lansdown, there are three main reasons share prices fall during recessions and other periods of uncertainty. 

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  1. Company profits are expected to fall, so the shares are worth less
  2. Uncertainty has increased, meaning stocks are riskier and worth less
  3. Investors want to take less risk, so they sell shares to hold safer investments like bonds or cash

So how can investors build an investment portfolio for the future, especially if we are heading for recession?

In a recession there will be winners and losers, with bigger companies more likely to survive than smaller companies.

Illustrating this point Scott Gallacher, director at Rowley Turton Private Wealth, says: “If you have a little shop with a healthy mortgage and you are both working, you have nowhere to go. But if you are a Tesco, you have a lot of margin.”

Reviewing clients' portfolios

Vince Smith-Hughes, director of specialist business support at Prudential UK, says there are a number of practical steps advisers can take to review their client’s investment portfolios.

Mr Smith-Hughes adds: “Before making any changes it’s important to refer back to the client’s last attitude to risk and capacity for loss assessment and ask the question ‘what’s changed?’. 

“Circumstances or the falls in markets could have changed both but kneejerk reactions in response to market falls are generally best avoided. This has been highlighted by the partial recovery in markets. At the time of writing, the FTSE 100 has recovered around 23 per cent from its lowest point.

“Another option to consider is whether it’s possible to take income from money held in cash in the drawdown, or at least switch to taking income from funds which have fallen the least. 

“In that way, the loss crystallised is reduced. Advisers are also looking at whether income could be taken temporarily from other investments or deposits outside of the pension which have been less adversely affected. An intrinsic re-analysis of the client’s individual situation is needed.”

Echoing his words Toni Sheen, director at PI Financial, says one of the biggest shifts to come out of the crisis will be advisers drilling down to the minutest detail when looking at their clients’ cashflow.

Ms Sheen says: “The biggest change is where advisers need to thoroughly go through their client, when we talk about risk and potential losses/gain; really drilling that down to monetary value and putting it into perspective, when we are talking about a potential 10 per cent loss.”

Rebecca Aldridge, managing director of Balance Wealth, adds: “We are doing slightly more testing of different scenarios where investment returns are much less than hoped, to see whether their goals are still able to be achieved.”