Investment Harmony

Sheet music for Star Carol
Investment Harmony

It’s the season for carol services and I have been to one in which my wife was in the choir and watched two that were ‘live streamed’. So much around us is undergoing change. We will, for example, miss having children with us at Christmas for the first time we can remember. In such times it is good to hold onto what has not changed and carol services are certainly part of that for us. If you haven’t had a chance to catch up on any carols this year so far then you could enjoy five minutes of John Rutter’s Star Carol with the Stay at Home Choir

As I was enjoying the beautiful arrangements of some of the Carols this year it made me think of the way that a good investment portfolio is arranged. I know, my mind should have been on higher things but the sacred and secular were always meant to exist together.
Different Parts

In a choir there are soprano, alto, tenor and bass singers. If the choir were simply sopranos it would still be a nice sound but it would have little depth to it and it is the other parts who give the support and colour. I particularly like Welsh choir music which is all male tenor and bass but after a while I miss those female voices.

A good investment portfolio will be a diversified portfolio. It will involve different investment funds whose returns are uncorrelated (i.e. one is not affected through changes in the other). In this way the level of risk is reduced.

For example, it has been shown that a portfolio with 75% invested in bonds (i.e. fixed interest investments) and 25% invested in equities (i.e. stocks and shares), which are, of course, higher risk than bonds, provides a higher return over time and exposes your portfolio to less risk than a portfolio which is 100% invested in bonds.
Balanced Sound

What you really don’t want in a choir, unless they are of course the soloists, is for one or two singers to have such strong voices compared to the others that you hear them all the time. A choir is a team effort and although, if you are musical, you will be able to identify the altos and the basses for example, as they blend their voices with the sopranos and tenors, you shouldn’t be able to hear individual voices.

A good investment portfolio is a mix of different types of investments and it works because each does its job in different economic circumstances to protect the whole from unacceptable losses. What constitutes a balanced investment portfolio will vary from investor to investor depending on such factors as your age, your employment status, your requirements for income and/or growth, your attitude to risk and capacity for risk.

However, each investor will want to include sufficient money on deposit or readily accessible for emergencies, a portion in equities for long term growth and a portion in lower risk investments for short term to medium term security.

What you do not want is one or two investment funds which hold so much of your money that if they were to fail to perform as anticipated, the whole portfolio would be at risk.
Dark and Light

The very best choral works, and this applies to other artistic fields as well, have shades of dark and light within them. Life is not a succession of jolly, happy experiences, although, hopefully, neither will it consist only of worry, anxiety, depression and regret. Our lives have a mixture of both and if that were not so we would not be truly human.

I love Joseph’s Song which looks into what Joseph may have been feeling as he saw the babe in the manger and the shepherds celebrating the good news that the angels had brought, but knowing that the child was not his

A good investment portfolio will not be all one shade. There is little point having a portfolio mainly of cash accounts and fixed interest investments. If that is your portfolio then you are at serious risk of inflation destroying the purchasing power of your money over time. There is also little point having a portfolio mainly of equities. If that is your portfolio you could be in trouble if an unexpected (and they usually are) market reversal occurs and you need to withdraw funds for any reason or you are dependent on your portfolio for income.

Risk and reward are directly related up to a point. Some risks are just not worth taking as they can lead to a total loss. If you invest in a risk-rated professionally managed portfolio over the long term it is generally true that if you invest in the higher risk versions of those portfolios you will achieve more growth than if you invest in the lower risk versions of those portfolios. However, in the short term those positions can be reversed. This is why it is essential that your investment strategy reflects your overall goals and objectives, short, medium and long term.
Real Enjoyment

To really enjoy choral music you need to know it well. You may like it on a first hearing but as you get to know it your enjoyment will increase. You reach a point when you could almost sing along with it (or you could if you were a good singer) and that is the height of your enjoyment. This takes time and hearing works on a number of occasions.

A good investment portfolio is unlikely to achieve a great deal in a very short period. An important feature of investing is that the longer you are invested the more the risk of loss reduces. If you plot the best and worst discrete annualised returns of a good portfolio over, say, 20 years you will find that this creates what we call a ‘risk funnel’. In other words the corridor of the best and worst returns narrows through the years. This happens because risk is diluted by time in the market.

Soloists are sometimes necessary. The great Christmas oratorios such as Handel’s “The Messiah” rely on soloists to proclaim the message of the work. While the choir may be counted in the hundreds there will usually be no more than four or five soloists.

A good investment portfolio can sometimes be set up on a ‘core and satellite’ basis. That is, the core is the main portfolio that is doing all the hard work to achieve your objectives. But you have a small number of investments which are your special favourites and you keep hold of these. The important thing about these investments, which tend to be higher risk than your portfolio, is that their total loss would not ruin your investment objectives or affect your standard of living. That is why they need to be a small part of your portfolio and definitely not the main thing.

I have for very many years used venture capital trusts (VCTs) as a satellite to my core investment portfolio. These are very high risk and not suitable unless you can afford to lose what you invest in them.

I also have one single open investment company (OEIC) fund that I use as a small satellite to my investment portfolio. This is the Smith & Williamson Artificial Intelligence Fund which aims to achieve capital growth by investing in companies engaged in the development and/or production of artificially intelligent systems. It has produced growth of 48.56% over the 12 months to 30/11/2020 and 120.90% over the last three years.
Please note that past performance is no guide to future performance and this is certainly not a personal recommendation as I do not know your circumstances. I only use it as an example.

I hope that these thoughts will help you as you review your own investment portfolio in readiness for all that 2021 might hold.

Wishing you and your family health, happiness, peace and prosperity this Christmas and in the coming New Year

Arthur Childs

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