Tips for the risk-averse investor

With returns on bank savings and bonds yields near all times lows, investors have turned their attention to the stockmarket. While buying shares can offer higher returns than other asset classes, it is not always a smooth journey. How should investors approach stock market investment? And what pitfalls should they avoid?

Don’t over trade – be clear about your own goals

Clear thinking is needed right at the outset about what an investment is trying to achieve. Trading too much and reducing stockmarket exposure at the wrong time, can materially damage long-term returns. A portfolio that is structured to be resilient should be given time to do its job.

In recent years, some of the best performing shares and funds have also been the most volatile. Investors should think about structuring their investment to match their goals, recognising their own timeframe and potential for anxiety. Reviewing quarterly and using standard benchmarks may be little help. Even Warren Buffett recently admitted that this year his fund could be behind the S&P 500 Index over a five-year period – the first time since the 1960’s. Investors would be wise not to pay much attention to that statistic; most have time horizons well beyond five years, and the index is not the measure of whether Buffett’s fund is meeting their longer term goals.

Beware of benchmarks – recognise your own risk tolerance

Caution is needed when considering benchmarks. Unfortunately, much of what investors are told about performance and benchmarks is unhelpful. Indices reflect a one-size-fits-all approach that may be little guide to individual goals. And, every investor has a different level of confidence and risk tolerance, meaning the journey can matter almost as much as the goals. The potential for big rewards in years ahead may matter little if getting there is a white-knuckle ride. If a portfolio is not structured to take the rough with the smooth, investors can end up with losses, selling at just the wrong time. Investors need to be candid about their own temperament, and match it with the right investment structure.

Allocate and review – structure for the investment journey

Maintaining a mix between shares and bonds has also proven its worth over the past decade. US research shows that a fund with 60 per cent in US shares and 40 per cent in government debt would have beaten most hedge funds and university endowments. This simple approach would also have cost less and would have proved relatively resilient in 2008. In the UK, a number of charities and endowments have taken a similar approach, aiming for a balance that will help to smooth out stockmarket cycles. If an entire portfolio is invested in shares, there is little potential for taking advantage of market sell-offs.

It is worthwhile rebalancing assets between major categories on a quarterly basis. If a portfolio is split between shares, bonds and possibly other asset categories such as deposits, rebalancing can help long term performance.

Investors should start with their personal goal in mind, and only use standard benchmarks where they match this. For some, the investment journey may be measured in ethical or sustainability terms. Shares have both the potential for making investors feel good, and at other times creating anxiety. The whole portfolio should be structured to handle that.

A version of this article appeared in Money Observer.

Disclosure: The opinions expressed in this article are my own, and may not represent the views of any firm or entity with which I am affiliated. Data and content provided are for information, education, and non-commercial purposes only. The information presented in this article has been obtained from sources believed to be reliable, however, I make no representation as to their accuracy or completeness and accepts no liability for loss arising from the use of the material. Articles and information do not represent investment advice.