Seven tricks to dodge the storm clouds threatening your portfolio

Volatile share prices are likely to remain a feature of stock markets in the coming months as inflation stays high, households are financially challenged, the war in Ukraine drags on and fears of a global recession mount. 

For some investors, sharp share price falls can be undermining – and lead to irrational behaviour, such as selling long-term investments into a falling market. 

Other investors, who have built their own investment portfolios from scratch through the use of tax-friendly Isas and pensions, can suddenly feel isolated. They start to question whether their investments remain fit for purpose – and wonder if the spread of their funds and shares is still appropriate for the difficult times that lie ahead. 

Yet help is at hand. There are a number of investment tools and rules of thumb that investors can use to steer them through choppy stock markets. By employing these tools and rules now, investors can help to keep their long-term investment wealth intact. 

1) Why it can help to be a copycat 

Most investment platforms offer model portfolios for customers who need a bit of inspiration or who are not confident designing a portfolio from scratch. 

They tend to be a list of around five to eight funds which, when bought together, make up a well-balanced portfolio with the chance of good returns. 

Platforms tend to offer an option for cautious investors, a second for investors happy to take on a bit more risk and a third for adventurous investors. 

There are also model portfolios for income investors. These portfolios are freely available for anyone to see – not only platform customers – just search for them on the investment platform websites. 

These model portfolios can be a great tool for checking if your own is on track. You do not have to follow a model portfolio to the letter – instead you can use it as a useful yardstick. Pick the portfolio that most aligns with your investment objectives and then see how it compares with your own. 

For example, if you are a cautious investor, but have a higher proportion of shares than model portfolios for cautious investors, you may want to dial down your holdings of equities and buy more bonds. 

Or, if you are an income investor and your dividends are not as generous as those offered by model income portfolios, you may wish to examine where you are going wrong. 

Most investment portfolios will have seen their values drop in recent weeks. But if you compare your investment returns to those of a similar model portfolio, you should get a rough idea of whether yours is performing as well as you could hope – or needs tweaking.

2) Try a comparison with an index

An investment portfolio can easily get misshapen. You may start with a well diversified portfolio, but as some investments perform better than others, it can become skewed. 

To check if you’re on track, you can compare your portfolio to an index that you’re trying to beat. 

For example, the MSCI World Index is made up of the biggest companies in the developed world. Companies listed in the United States currently make up 67 per cent of the index, Japanese businesses six per cent and UK companies 4.5 per cent. 

You can benchmark against these weightings. So, for example, if you have a higher proportion of US companies or US funds in your portfolio, it might be that you have more confidence than others in the US market outperforming in the future. 

But if your intention is not to bet big on the US market, you may want to sell some of your US funds, or hold off buying more for a while.

3) Use clever online pension calculators 

Will your investments provide you with enough money to take you through retirement – or will you fall short? 

It’s a hard question to answer, but for pension investments there are useful tools available such as online pension calculators. 

These ask you questions about how much you have saved and what you are invested in. They then calculate what level of retirement income that could produce – or how long your money is likely to last for. To come up with such numbers, they have to make assumptions, so the answers will be a bit rough and ready. But they will give you a sense of the direction you’re heading in. 

You can find a number of pension calculators online from the Government-funded Money & Pensions Service. Visit website moneyhelper. org.uk.

4) Is your platform giving you a nudge? 

If you are a DIY investor, it is up to you to make decisions about what you buy and sell. Even if you’ve gone astray and are taking on a huge amount of investment risk, your investment platform can’t warn you. They are not set up to give financial advice. 

Yet some investment platforms are finding a way to tread the fine line between giving customers a nudge if they need it, without it counting as advice. 

For example, wealth platform Hargreaves Lansdown has nudged over half a million customers in recent months to tell them their portfolios lack diversification. 

Of these, over a third have made changes to their portfolios as a result. So, if you receive an email from your platform warning you that your portfolio needs a little TLC, take heed. 

Increasingly, platforms also have tools that allow you to ‘X-ray’ your portfolio – in other words view how you’re invested by geography or sector. All of these are useful for checking if you are on track.

5) Check how many funds you have 

There is no one perfect number of funds that you should hold at any one time in an investment platform. The key is to have enough so that you don’t have all your eggs in one basket, but not so many that you lose sight of what you have. 

Rob Morgan, chief analyst at investment company Charles Stanley, shares his rule of thumb. 

He says: ‘Keep the number of holdings sensible – enough to diversify, not so much so you lose track. Ten to 20 funds should be enough for most people.’ 

Remember, though, it’s about quality, not quantity. 

Some funds are designed to offer you everything you need – the likes of global tracker funds or mixed-asset funds. If you hold one of these, you may not feel that you need to branch out further.

6) Split portfolio into core…and satellite 

One common investment pitfall is putting too much money into specialist investment funds which tend to be volatile. By specialist, I mean the likes of biotechnology, technology, space exploration or single-country funds. 

There is nothing wrong with holding such funds, but you should ensure broader based investments – which tend to be less risky – have a greater prominence in your portfolio. 

Charles Stanley’s Morgan recommends categorising your investments into ‘core’ and ‘satellite’ funds to make sure they are sized correctly in your portfolio. He says: ‘Think about the makeup of your portfolio, The central core should be mainstream investments, the bedrock. 

‘Around this should be satellites – funds that are more specialist in nature and personalise your portfolio.’ 

He adds: ‘It is important not to let a single investment theme or sector dominate your portfolio, which is why higher risk specialist investments should be satellites rather than core holdings for a majority of investors.’ 

7) Take a breath before acting 

Currently, it is easy to look at your portfolio that is rapidly falling in value and assume it is not on track. But this is not necessarily the case. 

Most assets are currently falling in value – equities, bonds, cryptocurrency – with global stock markets down around 16 per cent this year to date. 

So, before you make changes to your portfolio, pause and take a breath. You may not be faring any worse than most other investors. 

Gemma Boothroyd, analyst at investment platform Freetrade, says: ‘Market volatility is the perfect breeding ground for nail-biting and portfolio self-doubt.

‘But, remember, volatility is a function of stock markets and other financial markets. If your portfolio has been hit by asset falls this year, don’t take it as a sign that it’s not on track. 

‘Market volatility is how investors find opportunity and it’s the price you pay for the hopeful long-term outperformance of shares over cash.’ 

She adds: ‘Being level headed when you check on your portfolio will make a world of difference to the long-term outcome. 

‘It may sound fluffy, but if you’re checking on your investments in a state of worry, you’re going to spring into action – and it won’t necessarily be the right thing to do.’