1 April 2020
Diversify, Diversify, Diversify
This is certainly a time when one plan does not suit all.
Moreover this is the fourth major crash that I lived and invested through, and I am still standing, investing and looking forward to climbing mountains again. Every crash that I have lived through has felt like the end of the world as we know it. Nevertheless, bad though it is and terrible that people will die, it is most likely that this crisis too will end one day.
I have been asked to write this piece for those in retirement or near retirement. These people tend to be different because they are (or about to be) reliant on investments for their retirement income. As such, they are looking for a safe investment that gives high income.
Typically, in the past, people have found an asset like that in bank deposits and fixed interest investments. Although these were never absolutely safe, they were simple enough and gave fairly reliable income.
This is no longer the case: these kinds of investment, bank deposits, term deposits and other fixed interest investments, no longer give much income – and that income looks set to continue to fall. Moreover, we know that these investments are not perfectly safe: banks and other issuers of debt investments have failed in the past (although our banks appear to be solid, at the moment).
So, what to do with your money? First, if you are one of the few lucky ones and are currently cashed up, it would probably pay to hold on to some of your cash for the time being. Cash gives flexibility and although you should hold on to some, a part can be invested.
However, there are few people who I would advise to stay 100% in cash. You do need to remember that bank deposits do not come with a government guarantee and banks have failed in the past. We do not know where this current crisis is going, and I would not have 100% of my money in any single asset and that would include having 100% in cash.
As a store of wealth, you cannot beat a diversified portfolio. Holding a small amount in every different investment type (usually through a fund) ought to cover you from any likely economic event. There is no single investment type which will do well in every economic circumstance and the best thing is to protect yourself by spreading your money wide.
Clearly with a diversified portfolio you want to have a range of different investment types: shares, property, fixed interest and cash. Moreover, you should be diversified not just across each investment type but diversified by industry and geography.
In crises like this when there is so much uncertainty you want all asset types, even shares. These shares ought to be of a type that will continue to give income e.g. utilities, infrastructure or simply good strong businesses. These shares are ones that will continue to pay dividends and these dividends will improve your returns especially when the recovery starts.
You will probably have only small amounts of shares at the moment but you should not be completely without them – no one knows when markets will recover. Share values are down but there are certainly companies that will be able to continue to pay dividends which will make up sorely needed income.
You have to be wary of trying to time the market. International research house, Morningstar, shows clearly if you happen to miss the best month in any one year, your returns will be drastically reduced.
People who are already in the market should remember this and hold on. It is likely that there will be more losses but there will be a recovery. The only way that you can be sure that you will fully benefit from the recovery as markets bounce off the bottom is to hold right through.
Owning a little bit of everything in a diversified portfolio reduces the risk of being wiped out completely by a particular economic event. There will still be volatility in the portfolio but less absolute loss. We do not know what will happen; we do not know when this will end. The chances are there will continue to be losses, but whatever those losses are, diversification will cushion them.
Martin Hawes will be holding free financial webinars in the coming week, to offer knowledge and skills that are useful to get through the crisis, and for when it ends. For more details, click below.