Investors are always battling against uncertainty – it’s simply part of the investment process. Yet this year, any investor attempting to cast their eye forward into the future is likely to see an especially murky picture.
Covid continues to cause chaos – for how much longer it’s all but futile to guess. China and Russia are creating tensions on the international stage, although whether they will continue to bubble under the surface or emerge into all-out war we do not know.
Inflation is roaring away and could take off this year – or be reined in by rapidly rising interest rates. And as the pandemic has reminded us, you never know what new events will suddenly emerge to throw everyone off course.
Not the time: Holly Mackay, founder of investment website BoringMoney, believes that this is not the year to try to be clever and predict the upcoming investment trends
Put simply, investors looking for pillars of certainty to hold on to this year are faced with slim pickings.
Even the country’s leading investment experts, usually fonts of knowledge, are busy scratching their heads. Among them is Juliet Schooling Latter, research director at fund scrutineer Chelsea Financial Services.
She says: ‘Let me be the one to say it: no one knows what this year has in store for equity prices or bonds.
‘Normally, you’d look at the global economic cycle and make an educated guess, based on the path of economic growth, jobs numbers, and inflation. But there are so many uncertainties in the world at the moment that it’s almost impossible to make a call. So investing in this environment is tough.’
So what’s the plan? Well, it can be tempting to throw your hands up in the air and do nothing with your investment portfolio.
After all, if the future is so murky, surely investing in one sector or region is as good as any other. But, you are not powerless. There are actions you can take now to protect your investments against uncertainty – and to then profit as the fog clears.
Why this isn’t the time to be an investment hero
Holly Mackay, founder of investment website BoringMoney, believes that this is not the year to try to be clever and predict the upcoming investment trends.
Instead, she suggests spreading your wealth across all regions, sectors and asset classes so that you’re not too exposed to volatility in any one.
She says: ‘At a time when we don’t even know from week to week if we will still be able to go to the pub, trying to navigate an investment portfolio is pretty daunting.
‘The old adage about not putting all your eggs in one basket is more important than ever.
‘Trying to pick individual stocks, geographic regions or market sectors is a guessing game this year. It is not the year to try to be an investment hero.’
Take control: Taking back control of your investments in a time of uncertainty goes far beyond what you put in your portfolio
Investors looking for a diversified portfolio have several options. Experienced investors can construct one themselves, buying a range of funds and stocks from across the world and in different sectors – from consumer goods to industrial companies.
This is best achieved through an Individual Savings Account (Isa) or Self-Invested Personal Pension (Sipp).
This avoids handing over more of your profits to the taxman than you need to. Those who want an off-the-peg option could consider a multi-asset fund which Mackay describes as an ‘investment ready-meal’.
They are a single fund containing a sensible blend of investments to suit your appetite for risk. Some of the biggest global names offer these, including BlackRock, Fidelity, Jupiter and Vanguard.
Another sound option is to invest through a robo-adviser – the likes of Nutmeg, Wealthify or Clim8. These simply ask you a series of questions to gauge your appetite for risk and investment goals. They then put your money into a portfolio of hundreds – or thousands – of investments, thereby spreading your risk.
Get your house in order…with three savings pots
Taking back control of your investments in a time of uncertainty goes far beyond what you put in your portfolio. At times such as these, how you invest can be almost as important as what you invest in.
Rachel Winter is associate investment director at stockbroker Killik & Co. She says it’s more important than ever that investors think of their savings and investments as three different pots.
She explains: ‘The first pot should be your rainy day savings. This should represent around three to six months of expenditure and be money that is easy to access in case you have any financial emergencies.’
She adds: ‘The second pot should be designed to meet any foreseeable costs in the next few years – for example, a new car, a home move or the wedding of a family member. This money should also not be invested and kept in a savings account.’
The third pot, says Winter, is your long-term savings which you can afford to invest. ‘If you’re investing for several years,’ she says, ‘then stock market uncertainty is not going to affect you as you can afford to ride it out.’
While you cannot control stock market fluctuations, you can control what you pay in investment fees.
So keep a watch on what you’re paying to fund managers and to your investment platform so that any profits you do manage to squeeze from your investment portfolio goes into your pocket, not theirs.
Invest in quality…and hold for the long-term
At times like this, there’s one type of company best poised to succeed, according to Will McIntosh- Whyte, manager of the Rathbone multi-asset portfolio funds.
He says: ‘Invest in quality companies with strong management teams and good pricing power. That way, you can buy and hold for the long term.’
Inflation is creeping up in the UK, US and across Europe.
As companies face rising costs, McIntosh-Whyte believes businesses best positioned to deal with inflation are the ones that can pass on rising costs to their customers.
Those that cannot – because customers will not stomach higher prices – will suffer lower profits.
Such resilient companies can be found in all sectors. McIntosh-Whyte says: ‘We invest in technology companies Microsoft and
Adobe as customers will continue to pay for their products even if prices rise.
Payment provider Visa and consumer goods Company
Estee Lauder also fit this criteria.’
An uncertain world still offers opportunity
We may not know how some big economic themes will play out this year, but we do know they are likely to have an impact on financial market s.
Investors could therefore consider investing in companies that should benefit from these themes, irrespective of how they pan out.
Killik’s Rachel Winter explains: ‘For example, we do not know how and when interest rates will change this year. ‘But we do know that a lot of companies and individuals expect rates to move – and will be trying to protect themselves – or even speculating to try to make money from any changes.’
She adds: ‘That means we should see a big increase in trading volumes using financial products such as interest rate derivatives and interest rate options and futures.’
As a result, Winter is investing (on behalf of clients) in CME Group, the biggest derivatives marketplace in the world.
Similarly, while there is uncertainty about whether wars will break out this year, clearly there are rising tensions.
Says Winter: ‘Regardless of outcomes, countries will be spending more money on defence equipment to protect themselves.’
For this reason, Winter and her team have been buying shares on behalf of clients in American defence company Northrop Grumman, which manufactures traditional weapons as well as focusing on cyber security and the protection of satellites. Of course, some investors will not be comfortable investing in such a Company .
Investors cannot be certain which retailers will be the winners and losers in the next few years – as our shopping habits continue to change.
But regardless of outcomes, warehouses that provide infrastructure for online shopping services are bound to profit regardless of which retailers emerge triumphant.
Winter has been investing in real estate investment trusts, such as London Metric Property and Tritax Big Box, which buy these types of distribution centre.
And finally… take your time
Timing the stock market is a fool’s game, especially when everything is as uncertain as it is now.
But there is still value in thinking about when is the best time to buy. Juliet Schooling Latter, of Chelsea Financial Services, recommends investing small amounts regularly, rather than bigger, one-off lump sums.
‘Getting into the habit of investing regularly is a good thing,’ she says. ‘It also avoids the pain of seeing a lump sum fall dramatically in value if you happen to invest just before markets fall.’
She also recommends taking your time to make decisions while things are so up in the air. ‘Don’t try to be too clever,’ she says. ‘Often doing nothing – or making slower, more considered changes to a portfolio – is a successful strategy.’