Don’t be an extreme investor

Towards Prosperity Blog

Saturday 30 May 2020

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Over the course of my career in financial planning I have met many extreme investors.  What do I mean by that? People whose investment portfolio consists of a number of cash deposits (risk level 1) and a small number of direct shareholdings (risk level 8 to 10) with nothing in between.

Invariably these folk have described themselves as having a cautious or moderately cautious attitude to risk.  Investing at both extremes of risk may give the impression of a balanced or moderate portfolio but it is anything but that.  This is because the small number of direct shareholdings could result in a total loss of capital.  There is not much balanced about that.

What tends to happen is that when markets suffer a real downturn, as we have recently experienced, the falling share values cause fear and panic and not wanting to lose everything these investors sell up.  This simply crystallises their losses. Even if there is no actual loss they will certainly receive a lot less for their shares than they were previously valued at. As a result of this sudden loss of capital some will never purchase equities again and have to be content with seeing their cash deposits fight a losing battle against inflation.

Some will be brave enough to enter the market again but wait far too long because ‘once bitten, twice shy’.  Their share purchases tend to be into companies which have already done well and they pay a price for the shares which assumes that such growth in profits will continue.  It often doesn’t.

What such extreme investors overlook is that there are investments which cover the middle ground and give stability and strength to investment portfolios.

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The simplest way for investors to provide for the middle ground is to use a professionally managed risk-rated portfolio of unit trusts or Open Ended Investment Companies (OEICs).  These can be quite low cost if portfolios of passive (i.e. index tracking) funds are used.

These are performance figures from an actual passive balanced portfolio over the last 12 months and show the resilience of such middle ground investments even during the recent pandemic.

Flying Colours Core Balanced Portfolio
Period to 27 May 2020 Portfolio Change
12 months+ 6.05%
6 months– 0.04%
3 months+ 0.36%
1 month+ 4.97%

It is important to remember that past performance is not a reliable guide to future performance.

We are living in uncharted highly uncertain times.  That is all the more reason to make sure that your hard earned savings and investments are not all wasting away through inflation at one end and at risk of serious loss at the other.

Arthur Childs

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