High Quality Bonds in the Spotlight

There is an old adage in the investment world that ‘diversification is always having to say you are sorry’, as there is usually one (or more) parts of the portfolio that is a bit disappointing.  Every asset class has its day in the spotlight, for good or for bad, at some point.  

Over the past couple of years, shorter-dated, high-quality bonds that constitute strong defensive assets have delivered low returns and have had a finger pointed at them, by some.  Bond yields have been at historical lows, with yields on 5-year UK government gilts at or below 1% for the past three years.  Today they stand at around 0.2% and that is before the impact of inflation.  It is understandable that investors find low yields frustrating, but one needs to look at the bigger picture.  Bonds sit in long-term portfolios predominantly to provide some stability at times of equity market turmoil.

In the face of these low yields, investors have had two straight choices: accept the fact and stoically maintain the quality of their bonds; or go in search of yield by owning lower credit quality bonds and/or bonds of longer maturity.  We know that many have been tempted by the latter strategy.  We have stuck to the former to defend the portfolio at times of equity market turmoil such as this.  Remember that the lower the credit quality of bonds, the more they act like equities.

We think of yield-driven bond strategies – particularly high yield bonds – as akin to picking up pennies in front of a steamroller, which works nicely until you trip over.  The chart below looks at the performance of different types of bonds since the equity markets began to fall in February this year.  

It reveals that high-quality bonds have more or less held their value, doing the job asked of them.  As one moves down the credit spectrum to lower quality companies, returns become increasingly negative.  Owning these lower quality bonds, but with longer maturities, simply magnifies these falls (heading from left to right in the chart).  As it has always done, scared money runs from higher risks (including the possibility of default on bonds from less healthy companies) which drives yields up and prices down. It tends to move into high-quality, liquid assets driving bond yields down and prices up.

 

As Warren Buffet once said:

‘Only when the tide goes out do you discover who’s been swimming naked.’

Fortunately, your portfolio has kept its trunks on!  

 

Use of Morningstar Direct© data

© Morningstar 2020. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Data set

Data label Market index used
Global Govts 1-5 Hdg Markit iBoxx GBP Gilts TR
Gilts 1-5 TR FTSE WGBI 1-5 Yr Hdg GBP
GBP Corp 1-5 TR Markit iBoxx GBP Gilts 1-5 TR
Global Corp TR Hdg GBP Markit iBoxx GBP Corporates 1-5 TR
GBP Corp TR BBgBarc Global Aggregate Corporates TR Hdg GBP
GBP Corp BBB TR Markit iBoxx GBP Corporates TR
Global High Yield TR Hdg GBP Markit iBoxx GBP Corp BBB TR
Emerging Equity BBgBarc Global High Yield TR Hdg GBP
Developed Equity MSCI EM NR USD
UK Equity MSCI World NR USD

 

Risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

 

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

 

It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

 

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

Calculated Responses: One Key to Getting the Results You Want

This article covers emotions; and emotional reactions are natural. But when it comes to making money, it’s all about having a calculated response as it can make a big difference in the results.

You’re cruising down the highway when another driver pulls into your lane without warning, cutting you off. What do you feel? How do you respond?

You discover your child has a drug problem. What do you feel? How do you respond?

A competitor sues you in an attempt to ruin your reputation – and your business. What do you feel? How do you respond?

  • The actions highly affluent people take tend to be very deliberate and well thought out so they arrive at the most strategically, tactically beneficial approach.
  • Focus on the results you expect to attain – estimating the short-term and long-term consequences of particular actions you might take.
  • Seek out sounding boards – people you trust and maybe even professionals – and get their take on your proposed course of action.

Click the image below to read the full article:

Other notes and risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

A ‘Set-and-Forget’ Investment Approach? Forget it!

Systematic, evidence-based investing often results in very little activity in a portfolio.  It is wrong to think that this is the result of a ‘set-and-forget’ strategy.  The Firm’s Investment Committee would be aggrieved at such a suggestion!  Considerable effort goes on behind the scenes to allow this state of calm consistency to exist.  The fortitude and discipline to deliver ‘not much needs to be done to your portfolio except for rebalancing’ advice, comes from a rigorous process of ongoing challenge to the status quo.  

The broad terms of reference of the Investment Committee are set out below:

 

Manage risks over time

  • The Investment Committee is responsible for the oversight of the risk in portfolios and the wider investment process.  Meetings are regular and minutes are taken, which include all action points to be followed up on. Third-party inputs and guest members – such as Albion – provide independent insight and challenge.

  Challenge the process

  • The investment process at the Firm is driven by the latest empirical evidence and theory available. It is always open to challenge. If new evidence suggests that doing things differently would be in our clients’ best interests, then we will revise our approach. The investment process is evolutionary, but change is most likely to be slow and incremental.

Review the portfolio structure

  • The underlying characteristics of the Firm’s client portfolios are reviewed, including performance and risk level attributes. Risks (asset class exposures) and their allocations within a portfolio are evaluated. Any issues are raised and resolved. Existing asset classes are reviewed alongside asset classes and risk factors that currently sit outside the portfolios.  Areas of interest are placed on a longer-term ‘watch’ list.

Review the incumbent ‘best-in-class’ investment products

  • The incumbent products are ‘best-in-class’ choices seeking to deliver the returns due to investors for taking specific market risks. Each product has a role to play in a portfolio and its ability to deliver against this objective is regularly reviewed. Any product-related issues are raised and resolved.

Screen for new products and undertake appropriate due diligence

  • Although the incumbent products were recommended as ‘best-in-class’, new products are regularly being launched. Tough screening criteria are in place against which new funds are judged. New, potential ‘best-in-class’ products face detailed due diligence and approval.  They are included only when they make the grade. Given the quality of the products already in portfolios, the threshold for replacement is high, but not insurmountable for newer products.

Reaffirm or revise the investment process 

  • The Investment Committee is accountable for reaffirming or revising the structure of client portfolios. Risk (asset) allocations and product changes are approved by the Investment Committee.  Any actions arising from portfolio revisions will be undertaken, after discussion with and agreement by clients.

The next time you open your latest valuation report, remember that despite the lack of activity on the surface, the Investment Committee continues to paddle furiously behind the scenes to allow this be the case.  In the immortal words of the investment legend and author Charles Ellis:

‘In investing, activity is almost always in surplus.’

Perhaps we should amend this slightly to:

‘In investing, activity is – except for the Investment Committee –almost always in surplus.’

Other notes and risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. 

It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

Want to Win in Negotiations? You’ll Need These Three Tools

Laid out in this article are the three key tools you need to master in order to win in negotiations.

Over the years we’ve observed that success – in business and in life – often results largely from knowing what skills work extremely well and then practising those skills, a lot.

That seems to be especially true when it comes to negotiating. You can almost always get what you ask for – if, that is you are able to ask the “right” way. And we find that highly successful self-made multimillionaires, high-caliber professionals and other high achievers are typically extremely skilled negotiators.

  • It’s important to understand the full range of issues at play during a negotiation.
  • A mindset that seeks a win-win outcome is ideal.
  • Know your need and how to “read” the other side.

Click the image below to read the full article:

How to Win in Negotiations

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

How Playing the Long Game Could Help Build Wealth and Success

We have found that many successful people have one thing in common: They have a very good handle on a concept that is key to success: the long game.

The long game means having a concrete vision of your ideal future down the road the road – years or even decades from now – and talking specific, carefully considered action steps at every stage along the way to maximise your ability to get there.

  • Start with your ideal long-term vision of what you want to achieve.
  • Build a list of smaller goals and specific action steps that will make your vision a reality.
  • Persevere through challenges – while also remaining flexible as circumstances change.

Click the image below to read the full article:

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

Property Sellers Warned About Changes In CGT Rules

CIOT warns property owners to plan for a ‘seismic change’ on how CGT will be payable on residential property capital gains from April 2020.

The Chartered Institute of Taxation recently issued a press release alerting property owners who make taxable gains on their residential properties to plan for a ‘seismic change’ in how tax is paid.

From 6 April 2020 UK residents who sell a residential property that gives rise to a capital gains tax (CGT) liability, e.g. a buy-to-let property, must send a new standalone online return to HMRC and pay the tax due within 30 days of completion of the sale. This new filing and payment timeframe is, of course, different from the current position where taxpayers have until the self-assessment deadline (31 January after the tax year in which the disposal is made) to complete a tax return and pay the CGT.

The current system means that, depending on timing of the sale, CGT is due anything from 10 months to 22 months after the sale or disposal. The new 30-day deadline means people will have less time to calculate the CGT, report the gain and pay the tax.

The new return will need to be done online, requiring taxpayers to have a Government Gateway account to either submit the return themselves or to digitally authorise a tax agent to do it for them.

The CIOT has also received confirmation from HMRC, for the avoidance of any doubt, that the new reporting and payment regime applies only to taxable gains accruing on disposals of UK residential property made on or after 6 April 2020 (in the tax year 2020/21). This means that where contracts are exchanged under an unconditional contract in the tax year 2019/20 (6 April 2019 to 5 April 2020) but completion takes place on or after 6 April 2020 the 30 days filing requirement does not apply. The gain should be reported in the 2019/20 self-assessment return in the usual way.

If, however, exchange of contracts takes place on or after 6 April 2020, or the contract is conditional and the condition is not satisfied until after 6 April 2020, a return will be required within 30 days of completion of the transaction together with a payment on account within the same 30 days’ timescale.

COMMENT:

Those selling second properties or buy to let properties on or after 6 April 2020 will be brought within the scope of these new rules and will therefore need to ensure that they plan ahead to meet the necessary deadlines otherwise could face penalties. They will also need to have an understanding of their income position as the rate of CGT applicable will depend on their income for the whole of the tax year.

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

 

Don’t Leap Before You Look! The Benefits of Thoughtful Action

This article explores the benefits that come with the use of thoughtful action along with how quick-thinking is perceived and rewarded.

When people are confronted with adversity, opportunity or both, they often react quickly – with the intention of dealing with the situation rapidly and moving forward. These reflexively gut-driven responses are often rewarded by our culture, which praises the “fast-acting-do-er” who “gets the job done” or “puts out fires.”

Trouble is, rapid action can often result in adverse outcomes.

  • Quick responses to problems and opportunities don’t always lead to good results.
  • Thoughtful action rooted in your goals and in deep insights into a situation can create much better outcomes.
  • Accept your emotional reactions to big-moment situations – but don’t let them drive your decisions.

Click the image below to read the full article:

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

If it Ain’t Broke, Don’t Fix it…

There is always a temptation to fiddle around with a portfolio’s structure to try to position it ready for potential short-term global events, such as Brexit. Investors would do well to remind themselves that the core tenets of good investing hold true through all market conditions. It is also worth remembering that the efficiency of a portfolio’s strategy should be judged not on the post-event outcome, but in terms of the quality, validity and prudence of its construction discipline in the face of future market uncertainty. Portfolios are well-structured around solid investment truths, particularly the value of deep diversification.

Irrespective of what might happen in the future – including any of the potential permutations of Brexit – as investors we can rely on a number of truths: markets work pretty well and are hard to beat, so capturing the market return on offer using lower-cost, well-structured products makes good sense; spreading our assets broadly to ensure the risks we face are well-diversified will always sit at the core of a successful long-term strategy; balancing out the risks of equities by owning high quality bonds provides a good insurance policy; being patient (living through the short-term dips) and being disciplined (maintaining your philosophy and strategy over time) are fundamental to achieving the returns you need to fulfil your financial goals. At this point – given the short-term uncertainty, and possible anxiety, over Brexit – let’s focus in on diversification.

There are many ways in which an investor can be diversified, from individual securities to sectors, countries, investment styles and assets classes. Owning a portfolio that includes many thousands of companies, all market sectors, spread across developed and emerging economies, reduces the risk of being caught out by material negative impacts in specific markets, such as the UK. In the UK a few names dominate; the top 10 stocks represent more than 35% of the total UK market and the largest – HSBC – weighs in at 5.3% of the broad UK market.

A market-capitalisation weight to stocks across all developed and emerging markets shows a very different, well-diversified picture. The largest listed company in the world is Microsoft at 2.2% of the market. It is worth noting that Microsoft’s market capitalisation is over US$1 trillion, compared to HSBC’s US$150 billion. In a global market capitalisation weighted portfolio, HSBC’s weighting is greatly reduced to under 0.5%. Astute investors’ portfolios hold material allocations to non-UK equities and the majority of companies that this represents.

Sector diversification also makes good sense. Owning a material allocation to global stocks ensure that sector exposures are diversified. The UK has some large sector allocation differences compared to the world as a whole; in particular it has no major technology companies like Microsoft, Amazon and Google, despite technology stocks representing around 15% of global equity markets. UK exposure to technology stocks is less than 3%. The UK also has material overweights to the energy and basic material sectors.

Portfolios are well-positioned to weather Brexit uncertainty.

Brexit and the political chaos that we see before us, combined with the polarisation of politics between the left and the right is unsettling for all. We are where we are, unfortunately, whatever one’s Brexit views or political persuasion. Yet there are commonalities in all client portfolios such as broad diversification, excellently managed, lower cost products and high quality bonds, that we can all rely on to see us through this mess. If it ain’t broke, don’t fix it. Portfolios are as well positioned as they can be for whatever lies ahead. Please try not to worry too much about your portfolio. It is in good shape.

Other notes and risk warnings

Use of Morningstar Direct© data

© Morningstar 2018. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

Risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

Déjà Vu All Over Again

Below is an interesting and insightful take on investment fads and their future, from Dimensional.

Investment fads come and go. Letting short-term trends influence your approach may be counterproductive to pursuing your financial goals.

Investment fads are nothing new. When selecting strategies for their portfolios, investors are often tempted to seek out the latest and greatest investment opportunities. Over the years, these approaches have sought to capitalise on developments such as the perceived relative strength of particular geographic regions, technological changes in the economy, or the popularity of different natural resources. But long-term investors should be aware that letting short-term trends influence their investment approach may be counterproductive. As Nobel laureate Eugene Fama said, “There’s one robust new idea in finance that has investment implications maybe every 10 or 15 years, but there’s a marketing idea every week.”

Click the image below to read the full article:

Deja Vu Investment Fads

Other notes and risk warnings

This article contains the opinions of the authors but not necessarily Donald Wealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset Management Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.

The Pain and Pleasure of Diversification

Could’ve, would’ve, should’ve!

It is human nature to look at an investment that has done particularly well and wish you had been invested in it. We all risk being dragged into ‘if only’ mind games: ‘If only I had put a £10,000 into Amazon in 2003, I’d be retired by now’ 1. ‘If only I had bought Bitcoin at £1…’. These thoughts are dangerous to investors, as this fear of missing out (FOMO) can tempt them into taking speculative risks, often based on a rear-view mirror perspective. Concentrated risks have concentrated outcomes, both good and bad.

We have a lot of respect for the fund manager Neil Woodford, but anyone reading the news lately will have seen that his concentrated, high conviction, long-term strategy takes a lot of living with, which few investors seem to have the stomach for. His fund, which peaked at above £10 billion, has less than £4bn in it today and the doors are currently closed to new money and withdrawals. Concentration risks are real.

A powerful insight into the dangers of owning a concentrated portfolio can be found in a piece of research on the US market from 1927 to 2015 2. Of the 26,000 companies that have been listed on the US exchanges, only 36 made it through the whole period. The total wealth of $32 trillion generated over the period was entirely accounted for by just 4% of companies. The market as whole – the good and bad in aggregate – delivered an annualised return of nearly 7% after inflation p.a. i.e. investors doubled their money roughly every 11 years, over this period. That’s a pretty good outcome and a direct consequence of being diversified.

The difficulties of trying to time markets or to pick companies, sectors or managers, in the face of little evidence that professional investors have persistent skill in these fields suggests that a rational investor should eschew such approaches and seek to place their investment eggs across a wide range of baskets.

Diversification is ‘always having to say you are sorry’

The challenge with owning a diversified portfolio is that sometimes investors fail to look at the big picture, diving into the detail of their portfolio valuation to pick out the fund that is not performing well, and possibly moaning about it. Underperformance does not mean that it is a bad fund or a bad strategy or a bad manager, particularly when systematic, low cost funds are used in the portfolio to capture market returns. It just means that some markets (or parts of markets) are zigging while others are zagging – the very essence of diversification!

A diversified portfolio is not always easy to live with, as there will always be something you don’t own that is doing better than the portfolio and always something in the portfolio that is doing poorly. So, if your adviser has to say they are sorry sometimes about an underperforming fund always remember that a) they are not responsible for market returns and b) they are acting in your best interests by making you remain diversified and stick with the programme.

1 In 2003 Amazon’s stock price fell as low as $7 per share. At the time of writing, the share price is over $1775
2 Bessembinder, H., (2017) Do Stocks Outperform Treasury Bills? WP Carey School of Business, Arizona State University.

Other notes and risk warnings

Risk warnings

This article is distributed for educational purposes only and must not be considered to be investment advice or an offer of any security for sale. The reference to any products is made only to make educational points and must, in no circumstances, be deemed to be any form of product recommendation.

This article contains the opinions of the authors but not necessarily DonaldWealth Management (the Firm) and does not represent a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed.

It is not a promotion of Donald Wealth Management’s services. Donald Wealth Management strongly suggests that no investor should act on any of these ideas without first seeking financial advice. Past performance is not indicative of future results and no representation is made that the stated results will be replicated. The value of an investment is not guaranteed and on encashment you may not get back the full amount invested. Errors and omissions excepted.

Donald Wealth Management is a trading style of Donald Asset ManagementLimited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom (FRN: 223784). Donald Asset Management Limited is registered in England and Wales under Company No. 4675082. The registered office address of the Firm is: Stable End, 12 Heather Court Gardens, Four Oaks, West Midlands, B74 2ST.