Spreading your capital is the key to reducing your risk of losing money, and can also help to keep your investments moving forward even in difficult times.
Even after the stock market slump of the past two months, our Long Term Model Portfolio is showing a one-year gain of just short of 10%. That’s largely because it’s well spread across markets and investment managers, with £20,000 invested in 11 funds.
Newcomers to investment may think this is spreading the butter too thin. I can assure you that if you don’t spread the butter thin you’re much less likely to taste the jam. It’s tempting to think you should be able to pick the most promising market or sector and pile in, but that’s not a sensible way to invest.
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The land of the falling share price
But a year ago I was hugely optimistic about Japan - yet our one Japan investment in this portfolio is down 10% over 6 months and 12 months. I restrained my enthusiasm and put just 10% of the cash into Japan precisely because I know how far markets can deviate from expectations.
Fund supermarkets like FundsNetwork and HL Vantage make it so easy to create this kind of portfolio and manage it online that in my view you are crazy not to ‘diversify’ like this.
Of course there is a downside to diversification. As Warren Buffett, the world’s most successful investor, says:
“Diversification may protect wealth, but concentration builds wealth.”
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Concentration increases the risk of a big loss
Investing a big proportion of your cash in one fund, sector or share (as Buffett has done) may bring you huge success - but you can also lose a bundle. So concentration is a strategy for people running their own businesses or devoting a lot of their time to investing. For most part-time investors, diversification is the right approach.
Had you held our Long Term Portfolio for three years, your overall return would have been over 50%, and if you keep up that sort of rate of return you will become wealthy.
How the Long Term Model Portfolio has performed
| Fund | Investment | Six months | One year |
| AEGON Global Bond | £2,000 | £1,950 | £2,004 |
| M&G Global Bond | £2,000 | £2,038 | £2,150 |
| SLI Select Property | £2,000 | £1,806 | £2,250 |
| Jupiter Income | £2,000 | £1,974 | £2,196 |
| AXA Framlington UK Smaller Companies | £2,000 | £2,000 | £2,216 |
| Invesco Perpetual UK Aggressive | £1,200 | £1,260 | £1,392 |
| M&G International Growth | £2,800 | £3,027 | £3,290 |
| Jupiter Financial Opportunities | £2,000 | £2,000 | £2,158 |
| AXA Framlington Japan | £1,000 | £899 | £899 |
| Artemis European Growth | £1,000 | £1,049 | £1,218 |
| Total | £20,000 | £18,941 (-5.3%) | £21,959 (+9.8%) |
*Including reinvested net income. Data to 3/9/2007. Source: Trustnet
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The best and the worst of the portfolio
I expected AEGON Global Bond to be a dull performer. It’s basically stood still over the past year. It is a ‘strategic’ fixed interest fund and the managers try to avoid losing money while being ready to take advantage of positive conditions in the bond markets.
There haven’t been any positive conditions in the bond markets over the past year. I think there may well be opportunities over the next year, though, as the current distress sales of junk bonds by struggling hedge funds mean long-term investors may get chances to buy decent stuff at knock-down prices. So the fund still deserves its place in the portfolio.
The two property funds have behaved very differently. M&G Property is a UK-focused ‘bricks and mortar’ fund and has turned in decent stable results. SLI Select Property boomed - at one point it was showing an annual gain of over 35% - and then slumped, because it holds shares in property companies as well as physical properties. Between them these two funds provide a well-spread investment in commercial property in the UK and internationally.
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Our European share funds have led the charge
Over 12 months, all the share-investing funds have made money with the exception of Japan. Even there, Anja Balfour at Framlington has lost less money than most of her peer group, showing she is doing a good job. I remain confident that this market will deliver good returns in future.
Over the past year, though, it has been Europe that has delivered best, with Artemis European Growth having turned in a 21.8% gain over 12 months. I don’t expect a repeat performance in 2008, but conditions still look favourable and manager Philip Wolstencroft is well ahead of his peer group.
Invesco Perpetual UK Aggressive, Framlington Smaller Companies, M & G International Growth and Jupiter Financial Opportunities were all showing much larger one-year gains a few months ago. These are higher-growth funds and are bound to be more volatile.
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Time for change
There’s no reason to change the asset allocation of the portfolio just because of a bit of turbulence in the markets. 70% in shares, 20% in property and 10% in fixed interest is still the right allocation for an investment with an intended term of 15-plus years.
But since the global bull market has now been running for over three years, it’s appropriate to be a bit more cautious in terms of the way the money is managed. So we’re selling two aggressive growth funds: M&G International Growth and Invesco Perpetual UK Aggressive.
Both have done well from their concentrated style, but in current conditions a more diversified and cautious approach looks appropriate. So we’re buying Schroder Global Equity Income, a fund which aims to replicate the hugely successful ‘equity income’ strategy used by many managers in the UK over the past three decades in international markets. Manager Sonja Schemmann has a track record with a similar fund marketed to German investors.
At the same time, we’re raising our investment in Framlington Japan and Artemis European Growth. The sales raise £4,680 of which £500 goes into each of Framlington Japan and Artemis European Growth; the rest goes into Schroder Global Equity Income.
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Important Notice and Risk Warning
The EveryInvestor Model Portfolios are for general guidance only and do not constitute a recommendation for any investor. EveryInvestor does not provide individual investment advice.
Your own personal circumstances and tax position must be taken into account in selecting investments. We recommend that you obtain advice from an independent financial adviser before making investment decisions.
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance.
