If I was starting again, would I start from here? / Asset Allocation

I am often asked when I think that we will come out of recession and return to the ‘good old days’ prior to banking crisis’ and alike. Do I think the economic world is better or worse for the recession? My simple answer is ‘neither, it’s just different!’ I think that the current economy and its somewhat marginal growth will continue for some years to come and that this is ‘as good at it gets’ for the foreseeable future. I hope I am wrong, but if not, managing expectations and working within the confines of what we can influence is always a good place to start.

Noting the above, that does not mean that profit from investments cannot be achieved and we are all very aware that investment markets have changed significantly following the volatility of recent years. This has seen (possibly) differing questions being asked, such as ‘Are Gilts riskier than Equities (Shares)?’

It seems to make sense that there would be shorter-term periods when equity markets are less risky than the long-run would suggest. I also think this is what some commentators are driving at when they ask ‘are gilts riskier than equities?’ I think they are suggesting equity markets are less risky than normal at the same time that gilts are more risky than normal. However, the notion of prospective riskiness is closely tied to notions of current value. If equity markets are over-priced there is an increase in the associated level of prospective risk and vice versa.

Considering this further, it is really very difficult to quantify just how risky equity markets are or when they might be more or less risky than usual. It is this uncertainty that goes right to the heart of ‘riskiness’.

The question gives rise to the notion that investors have a choice, either investing in equities or, alternatively, going for gilts. This is a false choice and one that relies too much on market forecasts. The sensible approach is to maintain holdings of both equity and gilts for diversification. Confidence is high that gilts will go up in value in the event that equities go down in value. In a similar way, there is confidence that equities will go up in value when gilts go down in value. Choosing one area over the other is to put yourself at risk of trying to forecast returns, and this may not be a sensible tactic.

Diversification remains the Key

We have, over the years, advocated asset allocation and diversification of funds (within all investment arenas, such as pensions, ISAs, Investments, Trusts, OEICs & Unit Trusts) to ensure that opportunities for investment growth and income are achieved. We will continue to achieve this with our clients (Individuals/SMEs/Charitable Trust) and enquirer’s needs. Any financial/investment planning should be based on your objectives and attitude to investment risk. An Investment Risk Schedule can be found on the Chapters Financial website here.

No individual advice has been provided during the content of this Blog and Chapters Financial Limited can help you with your investment planning, in all its many formats, into the future, continuing to provide the independent financial advice (IFA) into 2013 and beyond.

Past performance is not a guarantee of future performance. Fund values can fall as well as rise.

Keith Churchouse, FPFS, Chartered Financial Planner, ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899