- There’s often a mismatch between an investor’s risk appetite and their portfolio
- It has been an especially difficult year to decide what to do with spare cash
- Too much of a home bias can be costly
In our weekly Portfolio Clinic, readers write to Investors’ Chronicle with their investment dilemmas, and we get two experts to look at their portfolios and suggest changes and improvements. The clinic offers insights both into the issues investors grapple with, and the thinking of financial advisers and portfolio managers. In the first 11 months of 2023, Investors’ Chronicle published a total of 47 clinics, covering a mix of financial planning and investment topics. As the end of the year approaches, we take stock of the most common mistakes and expert suggestions of 2023.
Bonds, bonds, bonds
The chart below shows the investment suggestions that were conveyed most often in this year’s portfolio clinics. Perhaps unsurprisingly, there was a lot of discussion on the balance between asset classes within portfolios, with our readers showing a tendency to own more equities than they perhaps should.
Our expert commentators suggested considering investing more in bonds in the majority of our 2023 clinics, both as a result of the changed investment landscape and more broadly as part of a bid to encourage investors to diversify their portfolios and carefully consider their attitude to risk. Higher interest rates have made bonds more attractive, and the closer we get to peak interest rates, the more our experts have felt comfortable suggesting them to readers. And next year looks more promising for the asset class – especially if the economy deteriorates and central banks start cutting rates.
But a longer-term lesson is that many investors do not correctly match their time horizon and attitude to risk to their holdings and asset allocations, an issue that explicitly came up in 16 of our clinics. Sometimes, readers simply pick holdings that don’t match their risk appetite. As Ben Yearsley, investment director at Shore Financial Planning, put it: “Readers often wish for a low-risk portfolio but are attracted to high-risk funds.”
In some instances, the investors featured in the portfolio clinics do not fully grasp just how much stocks can lose in a downturn. They might have the necessary time horizon to invest in equities, but not the risk appetite for a 100 per cent equity portfolio. As Rachel Winter, partner and investment manager at Killik & Co, recently told readers William and Valerie: “The vast majority of the investments in your portfolio are equities or equity funds. This constitutes a high-risk portfolio and does not fit with your stated risk tolerance level. You [say you] are prepared to lose 15 per cent in any given year, but the equity market dropped by more than this in 2022.”
For investors in a similar position, bonds and alternatives can both be options for de-risking and diversifying as well as generating some income – albeit keeping in mind that in the long term bonds are no substitute for equities when it comes to beating inflation.
In four cases, our experts also found that the readers’ portfolios did not seem to reflect a strategy at all. As Investors' Chronicle’s associate editor James Norrington told John: “It seems that your style of investing has a hobby element. While this in itself is not a bad thing, it means your holdings look more like a collection of shares that have piqued your interest than a strategic portfolio.”
The cash dilemma
Multiple readers asked what to do with their cash at a time of uncertainty. Mr A, for example, said: “I had a high risk tolerance, but the Covid-19 pandemic, Ukraine invasion, gloomy economic outlook and our increasing ages have tempered this and caused me to once again to hold nearly half of our portfolio in cash.”
With cash and short-term bonds paying quite attractive rates, not all our experts agreed on whether it was better to go back into the market as soon as possible or wait things out. But some pointed out that high inflation was eroding the value of cash faster than ever. In general, various readers were holding more cash than they should have in the long term.
Max Newman, equity specialist at Atomos, urged David and Susan to exercise caution over ramping up cash at the expense of investing. “I do have some sympathy with the tactical use of cash over the course of a market cycle,” he said. “But like with all portfolio hedges, you must remember to take it off; and the odds of getting both the timing and the investment selection right are thin. The ‘optionality’ that cash can bring to a portfolio has some value, but I think it is generally misunderstood just how expensive it is.”
Diversification and concentration
Excessive concentration was also a sore spot for our investors. This was sometimes because they had too much in a single or a few stocks, like Graham, who had almost 90 per cent of his £56,000 portfolio in just four UK-listed companies.
An excessive home bias was also to blame, although our experts tend to be quite forgiving of UK investors being overweight in UK equities. As Elliott Frost, investment manager at Lumin Wealth Management, put it, “it is not uncommon and negates any currency movement issues”. But our experts also point out that the subsequent underweight to other markets, particularly the US, can be costly in the long term.
Rob Morgan, chief analyst at Charles Stanley, told Jake: “I have my reservations about the higher valuations in the US market, but I would still allocate more there to create a better-rounded portfolio in terms of sector exposures and types of business.” Even investors like Jake who are mainly looking for income can use global income funds to help diversify their geographical exposure.
Sometimes, our readers’ portfolios had too many holdings to keep track of but still lacked diversification. Hamza, for example, had a whopping 78 holdings including many funds and exchange traded funds, but with a focus on UK and US equities and limited exposure to emerging markets. You can reduce your number of holdings while staying diversified, for example by checking your portfolio for duplications and avoiding holdings that are too small to impact its overall performance, as we explained in How to simplify your investment portfolio (IC, 24 November 2023).
