- Portfolio construction begins with calculated predictions about the future
- The best investment process is one that takes into account the many scenarios that could unfold
- Make sure your money is in the hands of an expert manager
Investors are paying close attention to politics in 2020, as heightening geopolitical tensions put pressure on the slowing global stock rally.
With growing hostility between the US and Iran, Brexit set to move into the next stage, and ongoing trade tensions between the US and China, investors are biting their nails in anticipation of what’s to come.
At home, things aren’t looking up either. Subdued economic and financial indicators are giving rise to a need for investors to comprehensively assess what the future might hold.
In an effort to help you plan for the future, Netwealth recently spoke to John Owen from MLC Investment Management in a webinar titled ‘Build a resilient portfolio for all stages of the economic cycle’.
John explains that by thinking very carefully about the events that await us in 2020 and beyond, investors can place themselves in a strong position to assess potential returns, the risks associated with generating those returns and also the opportunities for diversification.
Assess the future
“In portfolio construction, it's very important to be able to develop insight into how the future may evolve. There’s no point in waiting for the future to occur from a portfolio construction perspective and hoping to adjust your portfolio for those circumstances. It will probably be too late,” John says.
“You need to spend a lot of time assessing where we are today and where we could be in the next one, three or five years.”
He explains that investors need to consider a range of future scenarios before they can build a truly future-proof portfolio.
Some of these include:
Which path will you take?
Once you have considered all the different scenarios that could affect your future investments, you need to think about the route you will take before you set off on your journey.
John outlines three different directions an investor could consider – a simple/passive path; a diversified/active path; and an inflation linked path.
The first path offers a range of possible outcomes and consists predominantly of Australian and global shares, some bonds and property.
John says that this type of portfolio will perform very well in a rising share market, but cautions that it could see you undershoot your goals when share markets tip towards the negative.
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Path two, however, is much better positioned for negative trends as it is largely based on the concept of diversification, says John.
It involves building on the simple scenario by adding more bonds, investing in emerging markets, taking currency decisions, as well as looking at different asset classes.
Path three, John explains, is for the more seasoned investor. These portfolios are usually more actively or more dynamically adjusted for emerging market and economic circumstances, and require more experienced managers.
But no matter which path you choose, John opines that picking the right portfolio manager is a fairly key indicator of how successful your strategy will be.
And to help you with that, John advises you follow a set of qualitative and quantitative factors, including:
- Business stability – Including ownership structure, equity participation and incentives.
- Investment philosophy – Do they have one and is stock selection consistent with that philosophy?
- Investment approach – The process applied to affect the investment philosophy must be clear and appropriately resourced.
- Team structure – Structure of the team, culture, qualifications and knowledge
- Risk management – Are systems in place and adequate to understand portfolio and business risk?
- Capacity – Can the manager continue to accept normal fund flows?
Given the current environment, John says that the best investment process is one that takes into account the many scenarios (both positive and negative) that could unfold and how portfolios should be adjusted to address potential risks and return.
He has two closing tips for investors:
- Investing broadly, including an allocation to non-traditional asset classes and managers, can enhance diversification and provide a smoother pattern of returns.
- Don’t let a recent university graduate manage your money – think carefully about who you choose to make investment decisions on your behalf.
Find out more
Listen to the Netwealth webinar, ‘Build a resilient portfolio for all stages of the economic cycle’, for more expert insights when looking to build a future-proof portfolio.
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The information in this article is general in nature. Any financial advice it contains is general advice only and has been prepared without taking into account the objectives, financial situation or needs of any particular person. The article content is not intended to be a substitute for professional advice, so before you act on it you should determine its appropriateness having regard to your particular objectives, financial situation and needs, and seek any professional advice you require. Any reference to a particular investment is not a recommendation to buy, sell or hold the investment. The relevant disclosure document should be obtained from Netwealth and considered before deciding whether to acquire, dispose of, or to continue to hold, an investment in any Netwealth product.
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