Economic volatility can make investors uncertain about what to do with their portfolios. But careful planning can help deliver growth amid the chaos.
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.
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.”
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.
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.
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.
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.
We want to talk about your financial future.
This publication has been issued by Royal Bank of Canada on behalf of certain RBC® companies that form part of the international network of RBC Wealth Management. You should carefully read any risk warnings or regulatory disclosures in this publication or in any other literature accompanying this publication or transmitted to you by Royal Bank of Canada, its affiliates or subsidiaries.
The information contained in this report has been compiled by Royal Bank of Canada and/or its affiliates from sources believed to be reliable, but no representation or warranty, express or implied is made to its accuracy, completeness or correctness. All opinions and estimates contained in this report are judgments as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Every province in Canada, state in the U.S. and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, any securities discussed in this report may not be eligible for sale in some jurisdictions. This report is not, and under no circumstances should be construed as, a solicitation to act as a securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice.
This material is prepared for general circulation to clients, including clients who are affiliates of Royal Bank of Canada, and does not have regard to the particular circumstances or needs of any specific person who may read it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. To the full extent permitted by law neither Royal Bank of Canada nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of Royal Bank of Canada.
Clients of United Kingdom companies may be entitled to compensation from the UK Financial Services Compensation Scheme if any of these entities cannot meet its obligations. This depends on the type of business and the circumstances of the claim. Most types of investment business are covered for up to a total of £85,000. Deposits made with Royal Bank of Canada (Channel Islands) Limited in Jersey are not covered by the UK Financial Services Compensation Scheme. Royal Bank of Canada (Channel Islands) Limited is a participant in the Jersey Bank Depositors Compensation Scheme. The Scheme offers protection for ‘eligible deposits’ up to £50,000 per individual claimant, subject to certain limitations. The maximum total amount of compensation is capped at £100,000,000 in any 5 year period. Full details of the Scheme and banking groups covered are available on the Government of Jersey’s website www.gov.je/dcs or on request.