What's in your 'safe haven' suitcase?
Building an investment portfolio is a bit like packing a suitcase. Depending on your destination, you'll require different clothing in much the same way certain investing strategies may make sense at different stages in the economic cycle. But, there are also some core items you're probably always going to need.
When you put together your portfolio, it makes sense to have a selection of 'safe haven' investments as well as your more exciting assets. These are investments that will help you to avoid losing money throughout market ups and downs.
It's a common conundrum. When market are rising, it's easy to get caught up in the excitement of seeing your portfolio climb in value. In these periods, many of us start to think 'why am I holding onto these slower-performing investments?'. But to use another travel analogy, think of them as an insurance policy. When things go a bit pear-shaped, you're pretty pleased to have them.
The UK stock market this year has certainly shown how important this protection can be. Volatility in the first six months of 2016 has been higher than the preceding three years' average, owing largely to uncertainty in the lead up to the European Union referendum. Now that we've voted to leave, we can expect this to continue in the near term at least. The impact on investors' portfolios can be significant.
For example in mid-February, as we awaited David Cameron to fix a date for the vote, UK equities took a beating. An investor that started the year with £10,000 in a market tracker could have been down to around £8,870 at the FTSE All Share's lowest 2016 point (yes, it was lower in February than it was the day after the result was announced).
True, as long as that investor didn't sell their shares their portfolio would have recovered somewhat since, but it's never a nice feeling to watch your retirement savings plummet, even temporarily, and you'd be surprised at how many people still have a knee-jerk 'sell' reaction.
On top of Brexit, there are plenty of other events on the global agenda to keep investors' guessing. The next big one being the US election, whose outcome could equally affect stock markets around the world.
So inspired by my recent summer holiday reading, here are five investments to help you build a safer portfolio:
- Gold, the original safe haven asset, coveted by pirates and investment professionals alike. These days, it can be easier to invest in the shares of gold mining companies, rather than buying an actual bar of bullion. We like the BlackRock Gold and General fund, which gives you exposure to gold miners from around the world and has done extremely well this year in line with the rising gold price.
- US treasury bonds are another of the world's most popular, low risk investments. At the moment, yields on 10-year treasuries are sitting around 1.46% (according to Bloomberg on 1 July). This is higher than most other major developed markets, including the UK, key European nations and Japan (a good thing if you're looking for income in this low interest rate world). US treasury bonds are issued in US dollars, meaning you get the added benefit of exposure to the US currency, which is, in itself, considered another safe haven asset.
- UK government bonds (gilts) also have a proven track record of providing protection in tough times. Throughout the 2008–2009 financial crisis, they were one of the only asset classes to remain in positive territory. We are in a slightly different environment today, however, with rates as low as they've ever been throughout the developed world. While I'd still absolutely say they are a safe haven asset, it's worth keeping in mind they may not be the best long-term investment, as you're not likely to make much in terms of returns given their current yields.
- Having a part of your portfolio in cash can also be a smart move, particularly in turbulent times. The thing is to avoid selling when your funds/assets are at their lowest point and therefore locking in losses. Taking some profits when your funds are doing well, on the other hand, and then keeping aside that cash allocation while you sit out volatility can be yet another way of protecting your overall portfolio.
- Finally, we have targeted absolute return funds. This category is diverse and each individual fund within quite different, meaning funds do need to be allocated on a case-by-case basis. Those whose mandate is to be market neutral generally aim to deliver positive returns in all market conditions by potentially investing in a range of different assets and/or using different 'strategies' such as shorting stocks. They are not funds that target 'growth' specifically, meaning they won't be the star performers in a rising market, but nor should they lead the losses when things go south. Funds that we like in this space include Premier Defensive Growth and Henderson UK Absolute Return.
- Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Mr McDermott's views are his own and do not constitute financial advice.
Darius McDermott is managing director of FundCalibre
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Absolute return funds
Absolute return funds aim to deliver a positive (or ‘absolute’) return every year regardless of what happens in the stockmarket. Unlike traditional funds, they can take bets on shares falling, as well as rising. This is not to say they can’t fall in value; they do. However, over the years, they should have less volatile performance than traditional funds.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.