Financial markets can rarely be predicted at the best of times. Add to the mix rising interest rates, lofty inflation figures, a cost-of-living crisis and conflicting recessionary forecasts, and investors are faced with a somewhat tricky landscape in which to find growth.
Yet financial markets post-pandemic are booming – with the FTSE 100, for instance, reaching a record high in mid-February 2023, breaking through the 8,000-point mark.
“This can present something of a confusing picture for investors, with one side seeming to contradict the other," says David Storm, chief investment officer of RBC Wealth Management in the British Isles and Asia. “But it's important to remember the markets aren't the economy, and they don't always move in lockstep."
So, what should investors be thinking about to achieve portfolio growth in this current environment?
Here are five points worth considering.
Revisit your current investment strategy
Regularly reviewing your investment portfolio should be a fundamental part of any strategy, irrespective of whether the landscape is volatile or not. Has your current strategy delivered the level of growth you anticipated? If not, then what needs changing?
However, Carlos Gonzalez Lucar, head of manager research at RBC Wealth Management in the British Isles and Asia, sounds a note of caution. “There's no point in fixing something if it isn't broken," he says. “If your general investment principles are delivering on your goals, there may be no need to change them. Or at most, any changes might be minimal. Don't make changes for change's sake."
That said, investment principles that have served people well in the past might not be right for this economic climate. For instance, the static 60/40 portfolio (with 60 percent of a portfolio invested in equities and 40 percent in bonds/fixed income) didn't work in 2022, with both falling in value. Yet with markets and interest rates rising, the future may be brighter.
But there are many opportunities available to investors that are beyond government and corporate bonds and global equities.
“Investors need to think where they can generate returns from that are quite different from these traditional asset classes," says Storm. “That can be key to building a properly diversified portfolio that can work in different environments. The 60/40 approach effectively only has two return drivers. If you have four, five or six drivers, then you stand a much better chance of achieving your goals while minimising volatility risk."
Think short-, medium- and long-term goals
It's imperative to consider different timelines and how they align with your goals when it comes to comprehensive portfolio planning. Your age and how quickly you want to achieve those goals will be key factors.
For some investors, being clear on timelines and goals means they can allocate specific portions of wealth to each time period – for example, 60 percent or 70 percent to long-term goals. The rest can then be used to think about opportunities to accelerate achieving set goals, or take advantage of the natural opportunities that markets sometimes present.
“Your financial objectives develop as your life evolves," says Lucar. “And with markets evolving at the same time, you may capitalise on some opportunities and achieve your objectives faster than expected – take buying a house, for instance. You might then pivot your goals to achieving a more comfortable lifestyle."
Going after those opportunities should not, however, be interpreted as taking unnecessary risks. While you may have slightly different risk profiles for your timelines, your level of risk should be viewed in totality and aligned with a holistic wealth plan.
Be more nimble and active
While some investors are happy with a buy-and-hold long-term investment strategy, taking advantage of short-term market opportunities typically requires a more nimble approach – in particular, identifying and acting on them. This is often a key hurdle for individual investors.
Business owners and entrepreneurs, for example, may have less time to manage their portfolios. Similarly, they may not have enough investment knowledge or experience to identify the opportunities that they would readily invest in. RBC Wealth Management's 2022 survey of high-net-worth individuals (HNWIs) aged 25-54 revealed that 84 percent needed guidance on diversifying how assets are held, with 76 percent of all respondents requiring support with investment management.
For those investors who are happy to manage their own investments but don't have the time to do the necessary research, an advisory service often helps fill the middle ground.
“Being nimble doesn't mean day trading and getting in and out of investments at speed," says Storm. “Some of these investments may be held for years. It also doesn't mean diving into investments for fear of missing out without doing your due diligence. What it means is being alert to the opportunities and moving at the earliest opportunity."
When considering timelines and the need to be nimble, Lucar points to the LOQS investment framework – liquidity, opportunity, quality and stability – as a basis for portfolio positioning during periods of volatility.
- Liquidity typically entails holding sufficient cash to be able to move quickly when required
- Opportunity might include moving into other assets, such as commodities, or finding sectors that are benefiting from certain events or catalysts
- Quality largely refers to ensuring any fixed income is higher quality – AAA-rated, for instance
- Stability is about offsetting volatility in traditional markets with other trading strategies and increased allocation to alternatives
Identify emerging trends
In order to achieve growth, simply buying the index is not a guaranteed route – targeting specific sectors, asset classes or investment vehicles can help diversify portfolios and capitalise on growth areas. The challenge, of course, is identifying these in the first place.
In the long term, the first point of consideration for many investors is to consider what governments have on their agendas. “Ask yourself where governments need to spend to meet certain objectives, such as energy security, automation to make up for low productivity, logistics services or decarbonisation," says Storm.
Similarly, there is currently a lot of protectionism in the market, with countries – such as the U.S. and its Buy American Act – aiming to bolster business on a domestic level. This may well present more of a medium-term opportunity.
Specific sectors can also be attractive to investors. “We're particularly focused on opportunities in biotech," says Lucar. “It's arguably the most catalyst-rich or event-driven sector you can think of."
For some investors, an adviser will do most, if not all of the heavy lifting when it comes to identifying opportunities. Accessing these businesses is often done through collective investments such as funds, which provide diversity and can help mitigate broader market volatility.
Think outside the investment box
Opportunities for growth also exist outside of traditional asset classes in niche sectors, such as commodities and private equity. However, accessing these opportunities as an individual investor can be challenging. Private equity and venture capital funds, for example, may be "closed-ended," and there are onerous access rules for qualifying investors.
For many HNWIs, the opportunity to get in at the ground floor with startups is particularly attractive, even though it can come with sizeable risk. These vehicles can often be illiquid and come with higher fees too, so being clear on risk appetite is essential.
“Investors really are spoiled for choice," says Storm. "For those looking for growth, having so many options should play a large part in helping them stay diversified and navigate any current or future volatility, providing all the necessary research and due diligence has taken place."
Find out more about how to plan for, protect and grow your financial future.
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