How does one build an investment portfolio for the future?

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. 

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.

Before making any changes it’s important to refer back to the client’s last attitude to risk and capacity for loss assessment Vince Smith-Hughes, Prudential

“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.”

Ms Sheen says where advisers are not forensic enough in the manner that they approach annual reviews, it could give rise to complaints. 

She adds: “You will not get complaints because investment has dropped, that is part of investing. I have done a lot of mini reviews; touching base and discussing what we are going to be looking at, at the annual review, looking at their cashflow, [stress testing] and re-enacting scenarios."

Pension contributions

Making pension contributions could help some clients regain some of the recent investment losses. 

Mr Smith-Hughes adds: “Clearly care needs to be taken here with the Money Purchase Annual Allowance but it may be that some clients have taken tax-free cash but not yet drawn an income and thus have their full annual allowance available. 

“In the case of higher earners the changes to the level of the tapered annual allowance could mean more significant contributions are available in 2020/21 than has been the case over the last few years. Also pension contributions for spouses or partners could be considered.”

Gary Smith, a chartered financial planner at Tilney, says while he would expect some ‘tweaking’ to be done to clients’ portfolios, in terms of both asset allocation and funds, making wholesale changes is unlikely to be needed.

“Investing in risk-based assets should always be done with a long-term view, rather than trying to make short term gains or trying to time the markets,” Mr Smith adds.

“Given that some property funds have been ‘gated’, advisers might currently seek to avoid investing in this asset class for their clients who require an income.

“It is important to have discussions with clients about their long-term plans, and the level of investment risk they are comfortable taking.

"Following the recent falls in asset values, one potential option would be to increase the level of risk taken, in an attempt to recoup losses in a shorter period of time.”