Inside the mind of an investment manager

Each client has a unique desired outcome from their investment portfolio. It could be investing to provide growth for retirement or future generations, or to provide an income to fund day-to-day living. 

It is important that your investment manager has a deep understanding of your individual investment needs and aspirations. Risk comes in many forms and may mean different things to you as it does to your family and friends. We specifically need to understand your personal risk appetite and capacity for loss so that we can create an investment solution which produces the appropriate risk-adjusted returns.

Risk can also be stock specific and can take the form of capital and income volatility. When investing our aim is to provide capital growth so that the portfolio can provide an above inflation return. This coincides with the need for investments which provide a natural income.

When investing for an income, one of the key risks is that the investment portfolio performs poorly in the early years while income is being withdrawn, making it difficult for the portfolio to recover.

This can be even more challenging when the income requirements are inflexible. When markets are falling, and income is withdrawn, capital erosion makes it difficult to maintain or grow the original capital value year-on-year.

The good news is that this risk can be managed. The investment strategy plays a critical role, as does the ongoing communication with your investment manager to ensure income needs can be met in plenty time without last minute withdrawals when the market environment is unfavourable.

We work to understand the hypothetical worst-case scenario and the effect that this could have on income. By selecting investments which are in line with your risk appetite to create a well-diversified portfolio, we can ensure that the impact is much less severe when withdrawing an income.

If a portfolio experiences dramatic highs and lows, and funds are withdrawn at a low point, the portfolio can be quickly diminished by the compounding effect of the income being withdrawn combined with the capital losses on the portfolio.

Diversification is key

The father of Modern Portfolio Theory, Harry Markowitz famously called diversification ‘the only free lunch in finance’. The concept behind the ‘free lunch’ is correlation – or lack of it.

When markets are falling it is important to have a good mix of asset classes which are uncorrelated to each other help mitigate risk. We also try to build our portfolios that are internationally diversified across a number of countries. For example, during the initial Covid-19-pandemic-related market drop, global markets fell by more than 35%.

The main US indices, which have a high weighting of technology stocks, quickly recovered to new all-time highs. The more cyclical UK indices on the other hand have still not reached prepandemic levels. This shows how important it is not to be too overly exposed to one region.

Risk assessments are highly subjective and will change over time because of market or economic events, as well as changes in personal circumstances, objectives and preferences. We regularly review your circumstances and the markets to ensure that any of these changes can be incorporated into the investment strategy.

For more information on how Rebecca and the team can build a tailored investment portfolio that continues to work hard as your priorities change, please contact our Oxford office.

Call us on 01865 987485 or visit www.charles-stanley.co.uk/oxford-office

The value of investments can fall as well as rise. Investors may get back less than invested.

Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.