Speak to any decent investment adviser and they will preach the virtues of diversification.
In my language, that means: spread your money around. Good, rock-solid, textbook advice.
The other week, I was speaking to Jonothan McColgan, a chartered financial planner at Combined Financial Strategies, concerning an article I was about to write for The Mail on Sunday on the need for investors to regularly rebalance their portfolios (for the record, the article has since been published).
Mr McColgan is someone I hugely respect – he knows his investment onions inside out as proven by the numerous awards he has won for the sage advice he hands out on a daily basis.
In talking around the subject of rebalancing, he told me that, on average, only 10 per cent of long-term growth from investors’ portfolios comes from picking the ‘best’ investments.
The main driver of investment return, he argued, comes from having the right long-term spread of assets and then being disciplined in managing them (rebalancing, of course, being a key part of this overseeing role).
Mr McColgan went on to explain the main asset classes that investors should have exposure to – cash, fixed interest, commercial property and shares – and why they work as a whole.
“None of these assets will go up in value all the time,” he said.
“As cash moves through the economic cycle, different assets will do well at different stages. Everything will get its day in the sun eventually.
“However, this also means that the sun will also stop shining on each and every asset eventually.
“This is why instead of chasing the next ‘big thing’ investors should be looking at how to build a diversified portfolio that is suitable for their long-term plans and appropriate for the amount of risk they are willing to take.”
Yes, meat and drink to all chartered financial planners, but pearls of wisdom to many (non-advised) wannabe investors who have little idea about how to construct a portfolio designed to deliver a desirable outcome – be it the building of a sizeable retirement fund or a sum large enough to help children or grandchildren onto the property ladder.
Certainly, equities are currently enjoying their day in the sun after the Covid-19 wobbles of early spring – although some experts now believe the sun will soon stop shining once stock market valuations adjust to the shrunken world that awaits us.
It will be one dominated by unemployment, recession, corporate failure, plunging profits and heightened geopolitical tensions. Stock market corrections, especially across the Atlantic, are in the air. That is for sure.
One asset class where the sun is currently not shining is commercial property – usually a provider of steady and reliable investor income. Since the country voted to come out of the EU four years ago, UK commercial property has been in perpetual winter.