How to invest in an Isa for the new tax year to profit in the good times AND protect against storms
James Norton, a senior investment planner, at Vanguard UK, explains how he has simplified his portfolio so that it can profit in the good times and offer some protection in the bad.
It’s during turbulent times like these that you realise just how empowering it can be to have an investment plan that doesn’t sway with the latest trends, but is focused on giving you the best chance of success in the long-term.
It makes it easier to deal psychologically with the financial stresses that periodically erupt, as is the case now.
It’s why when it comes to thinking about my Isa, I don’t like to tinker with my investments, whatever the market backdrop. My plan is built to last because it is shaped by own long-term personal goals.
The UK stock market, as measured by the FTSE All Share index, has dived almost 30% since the middle of January, but a portfolio spread around the world and across both shares and bonds will have suffered less than this
That’s not to say that the Covid-19 crisis and its wider repercussions are like water off a duck’s back. They are clearly not.
But it is to recognise just how much sensible financial planning can help you navigate the difficult periods as well as help you reach your goals.
Most of my Isa is invested in a passive multi asset fund where 80 per cent is invested in equities and 20 per cent in bonds.
The balance is held in two active funds – global emerging markets and global credit funds. And I intend to keep it that way.
My core multi-asset holding gives me exposure to thousands of shares and bonds from around the world. So it’s highly diversified. The fund also rebalances automatically to maintain a constant 80:20 split between shares and bonds.
It is ultra-low-cost, ultra-low maintenance and right for me because the asset allocation is geared towards growing my capital. I’m comfortable with the higher risk that an 80 per cent allocation to stock markets implies but I’m also not so young anymore that I want to be 100 per cent invested in them. It’s down about 17 per cent from the peak of the market.
The fixed interest has helped protect me on the downside and ironically the falling pound has provided some additional protection for the overseas equities. I’m still sleeping fine at night.
That said, the two other funds I invest in do increase my risk a little further.
The global emerging markets fund combines three distinct yet complementary fund managers), which means it is less volatile than comparable funds. It’s down around 25 per cent since the market peak.
That’s what I expect from higher-risk emerging markets. Although it looks bad on paper it’s only 10 per cent of my portfolio, so it is perfectly manageable.
To counterbalance that, I have another 10 per cent of my Isa allocated to a global credit fund. This fund invests predominantly in investment-grade bonds, which historically act as natural diversifiers to equities.
It’s fallen a modest 6 per cent from its peak, so it has protected me from the worst of the equity market’s slump and added balance to the portfolio.
If you are a long-term investor then you can expect to have to ride out a number of market storms as you build your wealth over the years and diversification helps
The beauty of my picks is that they work and are low cost. And since my circumstances and goals haven’t changed, there’s no reason for me change them. So this year, I’m buying exactly the same holdings again.
Overall the portfolio is down around 15 per cent in what has been one of the most rapid and extreme sell-offs in stock market history.
To put that in context, from their peaks the FTSE All Share is down 29 per cent and the US S&P 500 is down 26.5 per cent. Diversification has given some protection against the stock market’s slide.
It may well get worse before it gets better. But buying more now with my Isa allowance this year helps me to benefit from the lower prices and the higher expected equity returns that Vanguard economists now predict over the next ten years.
I’ve learned from past mistakes not to be suckered in by the most recent top performers or latest investment fashions. I also don’t want to add a new fund to the portfolio each year as it gets unwieldy.
Over time, the longer I’ve invested, the fewer funds I’ve held. I’m particularly wary about some of the ‘exotic’ investments that in my opinion consistently over-promise – hedge funds, commodities, locked-up property funds, they’re not for me.
So if you’re thinking about adding a new fund to your Isa portfolio this year, ask yourself why?
Will it really improve your chances of achieving your long-term investment goals?
And what exactly is wrong with your existing holdings? If nothing, why not add more to them?